Malaysia’s sovereign wealth fund Khazanah Nasional returned to the convertible bond market to price on September 3 a US$500 million exchangeable sukuk.

The sukuk, which are exchangeable into ordinary shares of power company Tenaga Nasional, came just three months after Khazanah walked away from a fully-covered deal in June following its failure to achieve pricing targets.

This made for a fairly challenging transaction as investors still had fresh memories of the last deal. “We did not want to simply bring back the identical deal. We had to pay attention to what the investors’ concerns were at that time [when the previous deal was pulled] and address their concerns, at the same time achieving Khazanah objectives,” says a banker close to the deal.

The maturity of the exchangeable was one of the key features that were played around to ensure both investors and issuer were satisfied.

The June deal was a five-year bullet. In the latest transaction, the effective maturity was shortened by a year with a seven-year put-four structure that allowed investors better credit value as well as extended equity optionality.

For Khazanah, while seven year put-four was still an improvement from its past deals that usually have five-put-three tenor, it was less favourable than the five-year bullet structure it was aiming in June.

To compensate Khazanah for the investor-favourable tenor, the deal was marketed with a tighter but higher exchange premium range of 15%-20% relative to the June trade, which was marketed with 10%-20% premium.

The zero coupon sukuk were eventually priced at a 15% exchange premium over the stock’s close of 12.4 ringgit per share on September 3. As the stock had gone up over 3% since June, Khazanah was able to get a slightly higher exchange price than they would have achieved in the June transaction.

One of the key objectives of Khazanah was to guarantee that the deal achieve negative yield, continuing its legacy of doing exchangeable sukuk in negative terms since 2012. However, an increase in swap rates since June made it difficult to get the negative yield. The deal was then marketed with a fixed yield of a rather symbolic -0.05%.

This allowed Khazanah to be the only issuer in Asia that managed to do an equity-linked deal with negative yield since the finncial crisis.

Difficult market

The transaction had to fight for investors’ interest with three other CB transactions launched on the same day. By the time the exchangeable was launched at 5:30pm Hong Kong time on September 3, there were already two deals from Europe and one from Japan in the market vying for liquidity. Additionally, the previous night, the US had priced three CB transactions.

“A lot of chatter was there, but we were able to cut through the market. Khazanah is a repeat issuer and well-known and investors were anticipating this deal,” says the banker.

The stock’s volatility too had come down since June with a100-day volatility at 10%, making this challenging from the technical aspects which determine hedge funds’ interest in a CB transaction.

The deal was marketed at an implied volatility of 16.6% to 19.2%, while credit spread was assumed at 120bp. The exchangeable sukuk were backed up with US$100 million worth of asset swaps. Stock borrow was provided at 25bp cost and stock skid assumption was made at 2%.

The stock dropped 0.48% on September 4, well within the stock skid assumption of 2%. At the final pricing, the bond floor was 89.2% and implied volatility was 6.6% versus 100-day historical volatility of 10%.

The sukuk were trading at par in the grey market, while they traded slightly below par on early Asia trading on September 4.

CIMB Investment Bank, Deutsche Bank and Standard Chartered were the joint bookrunners for deal.