The new sukuk way for efficient construction financing
A novel Islamic sukuk transaction, which is the first securitisation of progress billings and the first to involve affordable housing has achieved financial close recently.
This landmark transaction – also the first syariah-compliant transaction globally – was developed, arranged and advised by NewParadigm Capital Markets Sdn Bhd.
SkyWorld Development Sdn Bhd is the pioneer to embark on a bond issue, which is structured and based on a programme for gradual drawdown.
SkyWorld is raising some RM50mil under tranche one of the RM600mil sukuk musharakah programme via a special purpose vehicle, SkyWorld Capital Bhd, for its SkyAwani Residence development in Sentul, Kuala Lumpur.
The project has achieved 100% sales, which allows for the bond to be structured.
RAM Ratings Services Bhd has assigned a preliminary AA3/stable rating for the sukuk, while Danajamin Nasional Bhd is guaranteeing the support facilities.
StarBizWeek interviewed the architects behind this landmark transaction – the founding partners of NewParadigm Capital Markets managing director Charanjeev Singh and executive director Danny Kwan on the deal.
Can you explain how this product works?
Charanjeev: From a credit structural standpoint, the structured programme aims to mitigate revenue, construction and liquidity risks of the relevant development project.
The financial programme is structured to be lent to a specific residential development project where draw-down is subject to meeting the pre-agreed eligibility criteria and conditions for which the credit investors’ risk position is clearly defined and mitigated.
Contrast that with conventional financing where the financial programme is lent to the developer and the credit investor is exposed to the developer’s entire business risk.
Liquidity and financing are perhaps the biggest problems for small developers. Thus, how will this new product disrupt the property market? What is its impact?
Kwan: The primary objective of this financial programme is to monetise the unbilled sales upfront rather than later. It provides for more efficient treasury and cashflow management for the residential developer and allows the developer to have a much lower cost of equity since cashflows are more efficiently managed as compared to the average (15% to 50 P O 20%) cost of equity average for residential developers listed on Bursa Malaysia as reflected by Bloomberg.
Essentially, it allows developers, regardless of size, to procure weighted average cost of financing that is comparable to any blue chip property developer, lower the leverage within its balance sheet without straining shareholders requirement to consistently inject additional personal equity to fund an ever-expanding property development portfolio.
This financial structure rewards the residential developer who is able to achieve successful execution of its development project from a lock in sales perspective, regardless of size or brand recognition; the application of this sukuk financing is more objective and rigorous.
Most conventional financing is essentially “name lending” where funds are made available to bigger “blue chip” type developers at relatively lower funding costs with much greater level of financial covenant.
Can this sukuk financing be applied other than monetising progress billings?
Charanjeev: This financial structure has a more efficient level of construction financing especially for developers with limited balance sheet capability since it lowers the application of the developers’ equity. In addition, this sukuk structure has the building blocks in making home ownership more affordable via a rent-to-own model, which we are working on. Are you targeting more property developers for this scheme? What are the size and type of properties?
Kwan: Yes we are. It’s aimed at developers who have an extensive portfolio of development projects especially the ability to achieve a high degree of lock in sales for their projects. It is meant primarily for residential development since historically it has relatively the lowest level of credit defaults compared with commercial or hospitality development.
What is the main problem facing property developers?
Kwan: Restricted funding with stringent loan covenants that accords very little flexibility notwithstanding the developer is able to achieve high degree of lock in sales for their relevant development project.
This financial programme is intended to be non-discriminatory in its application where as long as the pre-defined risk metrics is effectively mitigated, the developer should be allowed to extract development profits so as to ensure a more efficient balance sheet and achieve a much lower effective cost of equity.
How secure is this new sukuk?
Charanjeev: The sukuk is structured to mitigate revenue, construction and liquidity risks for the credit investor. Historically the default rate for this type of structure from a global issuance track record has been very good as there are no defaults. What happens if the the project encounters delays? As in the project is not completed on time, and hence results in cost overruns?
Kwan: The sukuk has the structure to mitigate delays and cost overruns whereby the sukuk holders will have an independent project certifier who will periodically check on the project progress.
The intention is to have a forward warning mechanism that anti-cipates potential problems that are identified and mitigated before it occurs.
In addition, the availability of standby project facilities ensure funding is available to encounter most of the unforeseen events that may occur.
Do you see s huge demand for this product from both the institutional and retail investors?
Charanjeev: It represents a relatively safer credit structure wherein the investor is exposed only to the relevant development project for which the credit risk is clearly identified and mitigated and over a relatively short term credit exposure of not more than three or four years.
This is in contrast to conventional financing where the credit investor is exposed to the developer’s entire business risk and over a relatively longer tenure.
For the retail investor, this sukuk structure affords are higher return than current fixed deposits and is fully asset-backed.
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