Islamic finance - Winner: MRCB Southern Link

Bookrunner: HSBC Bank Malaysia

Malaysian Resources Corporation Berhad's (MRCB) completed the world's first ever combination of Islamic and conventional financing on June 10, through MCRB Southern Link Berhad (MSLB), a funding vehicle set up to finance the construction of a major toll road connecting Singapore with Malaysia - the Eastern Dispersal Link (EDL) expressway in Johor Bahru.

The resulting deal, denominated in Malaysian ringgit, combined a MYR845 million fixed rate senior Islamic sukuk ($233 million) and a MYR199 million junior sukuk, with an innovative 10-year MYR220 million syndicated term loan. Sukuk is a Shariah-compliant financial certificate which replicates business risk and rewards in the same way as conventional bonds, but ensures investors get paid a share of profits in the venture rather than interest on a loan.

To obtain the maximum benefits from the loan, a tenor of up to 10 years was proposed. The bond proceeds will be used for construction payments first, and once they are fully used up the loans will be drawn to pay for construction.

The senior sukuk was initially rated AA3 by Ratings Agency Malaysia (RAM) and the junior sukuk at A2. The senior sukuk was issued in 16 tranches and the junior sukuk in four tranches to suit the complex cashflow profile of the project.

Karen Wan, an analyst covering infrastructure and utilities at RAM, says: "A key consideration in the rating analysis is the company's role as a contractual intermediary for the MRCB Lingkaran Selatan, the concessionaire for the EDL. As such, we view both companies in tandem from a credit standpoint."

Covenant cover

The security package ensures the sukuk holders have full recourse to the concessionaire. While a funding intermediary is unusual for toll road financing projects, the legal position of the senior sukuk holders is not prejudiced because the concessionaire is not itself the issuing entity.

The senior sukuk holders and term loan lenders also have the option to accelerate payments under the sukuk in the event of default on, or termination of, the contractual arrangement between the issuer and the concessionaire for the construction of the EDL.

Wan says: "This innovative and unique financing structure has a relatively aggressive debt-equity ratio of 80:20 and was well accepted by banks and the rating agencies."

HSBC Bank Malaysia acted as joint principal adviser, lead arranger and lead manager for the sukuk, and was joint mandated lead arranger and bookrunner for the term loan. Wynce Low, head of DCM at HSBC Bank Malaysia in Kuala Lumpur, says that a decision was made to place the bonds to strategic investors privately due to volatile market conditions; however the deal attracted a strong and diversified investor base - including HSBC itself.

"These investors are long-term investors that look at the strength of the project upon completion. Typically bonds with strong traffic flows have a good chance of rating upgrade upon completion. There is a resilient traffic flow across the Malaysia and Singapore causeway which translates into a good cashflow."

Spencer Lake, head of debt capital markets at HSBC in London, says: "Bifurcating the financing allowed for the debt to amortise at different times and in a way that reflected the cashflows on the deal. And the real beauty of mixing Islamic with conventional financing means you can create price tension. We could have done it in a single format but by doing it this way we got a really good deal for the issuer."

Credit says... It is rare that a bond launch should have ramifications over and above the immediate context of the deal, but MRCB's Islamic bond is one such example, combining an Islamic sukuk with a conventional 'western' loan in an illustration of how much the two financial worlds are converging.

Issuer: MRCB

Date of issue: Jun 10, 2008

Size of deal: MYR1.26 billion (senior sukuk, MYR845m; junior sukuk, MYR199m; term loan, MYR220m).

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