SUKUK FOCUS

May 2010

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 MAY 2010

PUBLISHER’S NOTES

Editorial Contacts:

Islamic Ratings
Welcome to our new look! As you can see, the Islamic Finance
Bulletin has been given a face-lift, both graphically and editorially. The
Zakariya Othman
Head
idea had germinated amid an increasing sense that it was “time for a
(603) 7628 1018 change” - for the bulletin to get a newer, more contemporary look;
zakariya@ram.com.my especially when RAM is celebrating its 20th anniversary this year. While we
had been open to the prospect, we had strongly felt that a change of such
Ezza Ibrahim
Manager
significance should extend beyond the cover and be built around the
(603) 7628 1084 information needs and preferences of our readers.
ezza@ram.com.my
The redesigned cover features fresh, crisp and clean lines - with a new
Noor Maliana Mansor
Analyst
tagline, Sukuk Focus; this differentiates us from other Islamic finance
(603) 7628 1029 publications in the market. Inside the bulletin, the editorial content has
maliana@ram.com.my also been rearranged, reflecting the way readers prefer information to be
presented nowadays.

To start with, Sukuk Focus will tie in with our current theme on sukuk
defaults. The landscape of the global sukuk market has indeed changed. A
few years back, sukuk defaults had been virtually unheard of. Today, the
industry has been surprised by a string of defaults, especially those that
had earlier been celebrated as being the most innovative. While some
have argued that there is no such thing as a default in Islamic finance due
to the profit-sharing and risk-avoidance nature of the transactions, others
are pointing their fingers at the Islamic structures and have begun
questioning the Shariah-compliancy of the issuances.

TABLE OF CONTENT
Quarterly Sukuk Rating
News…………………………….……….3
The Case of Wrongly
Accused……………………….……….9
Sukuk Defaults – Local
Flavours………………………………11
Setting the Risk Assessment of
Sukuk in Perspective – Focus
on Debt-Based Sukuk…………23
Market Statistics……………..….25
Ringgit Sukuk Market
Report………………….………………30
2
But is it fair to put the blame on Islamic finance per se? Criticising
Islamic finance for sukuk defaults is both simplistic and misleading.
Nonetheless, the virtuous image of Islamic finance has been tarnished
by these high-profile default cases. Hence correcting the perception of
sukuk defaults is vital for the market to move forward and grow
further.
On this note, Sukuk Focus’ spotlight will be on the real culprit behind
the recent sukuk defaults and the possible impact on the investing
community. We will discuss the fall of the infamous USD3.52 billion
Sukuk Ijarah by Nakheel and also take a peek at some cases that are
closer to home. While sukuk default is the main theme of this issue,
we will also delve into the subject of setting the risk assessment of
sukuk, with particular focus on debt-based sukuk, and the rating of
partnership-based sukuk.
Our new format will also include rating updates and redesigned charts
with a typeface that is more reader-friendly, inclusive of brief
narrations. All this is aimed at creating a reading environment that is
both inviting and compelling.
We hope you will like what you see as we are really excited about
bringing our new look to you. However, some things have not changed
- the top-quality sukuk information that you have been counting on
from our Islamic Finance Bulletin over the last 7 years, since we were
first published in 2003.
Quarterly Sukuk Rating News – 1Q2010
Toyota Capital’s ratings reaffirmed and revised
outlook to negative
1. Both long- and short-term ratings of Toyota Capital
Malaysia Sdn Bhd‟s (Toyota Capital or the Company)
RM1 billion Islamic Commercial Papers/Medium-Term
Notes Programme (2008/2015) (Islamic CP/MTN
Programme), was reaffirmed at AAA(s) and P1(s).
2. The ratings of Toyota Capital‟s RM1.2 billion MTN
Programme (2008/2018) and RM400 million MTN
Programme (2005/2012) (collectively, the MTN
Programmes) have also been reaffirmed at AAA(s).
3. At the same time, RAM Ratings has reaffirmed the
P1(s) rating of the Company‟s RM600 million CP
Programme (2004/2011).
4. The rating outlook on all the long-term ratings has
been revised from stable to negative.
The enhanced ratings of Toyota Capital‟s MTN and CP
Programmes reflect the credit strength of the irrevocable
and unconditional guarantee extended by Toyota Motor
Finance (Netherlands) BV. Similarly, the ratings of the
Islamic CP/MTN Programme are underpinned by a
Purchase Undertaking from Toyota Capital, which is in
turn backed by the irrevocable and unconditional
guarantee extended by Toyota Netherlands, with the
ultimate credit support stemming from Toyota Motor
Corporation of Japan (Toyota Motor or the Group).
Hence, the ultimate support from Toyota Motor
enhances the credit profiles of these conventional debt
facilities beyond Toyota Capital‟s stand-alone credit
strength.
Toyota Motor‟s superior business profile is underscored
by its position as one of the world‟s largest vehicle
manufacturers, as well as its strong branding.
Nevertheless, the negative rating outlook reflects RAM
Ratings‟ concerns over the Group‟s future earnings,
arising from the uncertainties surrounding the economic
recovery of Toyota Motor‟s key markets - Japan, the
United States and Europe.
Editor’s note: On our press release dated 8 March 2010, RAM
Ratings has maintained the negative outlook on the debt and
sukuk ratings of Toyota Capital, after factoring in the potential
impact of the worldwide recall of Toyota vehicles on Toyota
Motor Corporation of Japan.
Golden Crop’s Sukuk Ijarah ratings reaffirmed
with a stable outlook
RAM Ratings has reaffirmed the respective AAA, AA1, A1,
A2 and BBB1 ratings of Golden Crop Returns Berhad‟s
(Golden Crop or the Issuer) Series 1, 2, 3, 4 and 5
Sukuk Al-Ijarah (Sukuk), with a stable outlook.
The reaffirmation is premised on the plantations‟
performance, which has fallen within our expectations,
as well as loan-to-value (LTV) ratios and debt service
coverage ratios (DSCRs) that commensurate with their
respective ratings. Golden Crop is a bankruptcy-remote,
special-purpose company that had been set up as the
financing vehicle for the sale-and-leaseback transaction
involving 17 plantations and 5 mills under the purview of
entities within the Boustead Holdings Berhad Group.
This transaction‟s strengths include the senior-
subordination structure of the Sukuk and its structural
features that support the ratings. These are, however,
moderated by the vulnerability of the Plantation Assets‟
performance to the volatile price movements of crude
palm oil (CPO). Nevertheless, RAM Ratings notes that
the plantation estates (the Lessees) have been able to
meet full and timely payments on their scheduled lease
obligations.
Focal Quality’s Sukuk Ijarah ratings reaffirmed
with a stable outlook
RAM Ratings has reaffirmed the respective AAA, AA2, A2
and A3 ratings of Class A, Class B, Class C and Class D
of Focal Quality Sdn Bhd‟s (Focal Quality) RM190 million
Sukuk Ijarah Islamic Debt Securities (Sukuk Ijarah),
with a stable outlook. The reaffirmation is premised on
the overall financial performance of the underlying
properties, i.e. Ipoh Parade, Seremban Parade and
Klang Parade (collectively, the Parades), as well as the
credit support that commensurates with the respective
ratings.
Under this Islamic sale-and-leaseback transaction, Focal
Quality had been incorporated to acquire the Parades
from Lion Ipoh Parade Sdn Bhd (LIP), Lion Klang Parade
Sdn Bhd (LKP) and Lion Seremban Parade Sdn Bhd
(LSP) (collectively, the Lessees). Upon the acquisitions,
Focal Quality had entered into lease agreements with
the Lessees; the lease payments are used to meet profit
payments on the Sukuk Ijarah while the Sukuk Ijarah
3
will be redeemed using proceeds from either: (i) the
Parades‟ internally generated funds; (ii) the
shareholders of Focal Quality; or (iii) the proceeds from
the disposal of the Parades to the Lessees or in the open
market.
During the reviewed period, the performance of Ipoh
Parade and Klang Parade had remained commendable,
supported by higher average rental rates (ARRs) and
healthy average occupancy rates (AORs). Seremban
Parade‟s performance, although better in fiscal 2008, is
still below our expectations amid the difficult operating
environment and intense competition in the area.
Negative Rating Watch maintained on rating of
Senai Desaru Expressway’s BaIDS
RAM Ratings has maintained the Rating Watch, with a
negative outlook, on the AA3 rating of Senai-Desaru
Expressway Berhad‟s (SDEB or the Company) RM1.46
billion nominal value Bai’ Bithaman Ajil Islamic Debt
Securities (2005/2024) (BaIDS). SDEB is a special-
purpose company incorporated to undertake the design,
construction, management, operation and maintenance
of a 77-km highway in Johor, known as the Senai-Pasir
Gudang-Desaru Expressway (the Expressway).
The Rating Watch is premised on the delayed
commencement of tolling operations for the Expressway,
and the consequent impact on its traffic volume and
SDEB‟s future cashflow. Other factors influencing SDEB‟s
cashflow include the delayed completion of the
Expressway‟s Package 3, which the Company now
expects to wrap up by mid-2010. A protracted delay in
the completion of Package 3 and lower-than-expected
growth in traffic volume would have a severe negative
impact on SDEB‟s cashflow and debt-servicing ability.
RAM Ratings' Rating Watch highlights a possible change
in an issuer's existing debt rating. It focuses on
identifiable events such as mergers, acquisitions,
regulatory changes and operational developments that
place a rated debt under special surveillance by RAM
Ratings. In a broader sense, it covers any event that
may result in changes in the risk factors relating to the
repayment of principal and interest.
Issues will appear on RAM Ratings' Rating Watch when
some of the above events are expected to or have
occurred. Appearance on RAM Ratings' Rating Watch,
however, does not inevitably mean that the existing
rating will be changed. It only means that a rating is
under evaluation by RAM Ratings and a final affirmation
is expected to be announced. A "positive" outlook
indicates that a rating may be raised while a "negative"
4
outlook indicates that a rating may be lowered. A
“developing” outlook refers to those unusual situations
in which future events are so unclear that the rating
may potentially be raised or lowered.
Editor’s note: On 8 April 2010, the long-term rating of the
BaIDS has been downgraded to C1, while the outlook on the
rating remained negative.
Hubline’s A2/P1 ratings reaffirmed
RAM Ratings has reaffirmed the respective A2 and P1
ratings of Hubline Berhad‟s (Hubline or the Group)
RM150 million Murabahah Commercial Papers/Medium-
Term Notes Programme (2005/2012), as well as the A2
rating of its RM70 million Bai Bithaman Ajil Islamic
Bonds (2005/2012); both long-term ratings have a
stable outlook.
The reaffirmation reflects Hubline‟s fairly resilient
operations despite economic vagaries, anchored by the
Group‟s extensive network and niche routes that give it
a competitive edge. Meanwhile, the Group‟s
commendable liquidity profile is supported by its robust
cash reserves, especially after its recent rights issue.
On the other hand, the ratings remain moderated by the
cyclical nature of the shipping industry. The Group is
also exposed to volatile bunker costs and hefty capital
outlay.
PKNS’s debt facilities A1/P1 ratings reaffirmed
RAM Ratings has reaffirmed the A1/P1 ratings of
Perbadanan Kemajuan Negeri Selangor‟s (PKNS or the
Agency) RM300 million Murabahah Commercial
Papers/Medium-Term Notes (MCP/MTN) Programme
(2004/2011); the long-term rating has a stable outlook.
“Despite the subdued property market in 2008 and
1H2009, PKNS managed to record improved property
sales; property development projects at choice locations
like Shah Alam, Kota Damansara, Kelana Jaya and Bangi
contributed 66% of total revenue last year. The Agency
is also in discussions with several parties vis-à-vis
Selangor Science Park 2 (“SSP2”), which if materialised,
would add vibrancy and spur further residential and
commercial interests in SSP2,” elaborates Shahina Azura
Halip, RAM Ratings‟ Head of Real Estate and
Construction Ratings, on the rating reaffirmation. “Apart
from the steady stream of progress billings from its
various property developments, proceeds from land
sales and income from its privatisation ventures are
expected to contribute positively towards the Group‟s
financial performance over the near term,” she adds.
Lafarge Malayan Cement’s Islamic debt facility
long-term rating upgraded from A1 to AA2 with
stable outlook
RAM Ratings has upgraded the long-term rating of
Lafarge Malayan Cement Berhad‟s (LMCB or the Group)
RM350 million Al-Murabahah Commercial
Papers/Medium-Term Notes (2003/2010) (CP/MTN),
from A1 to AA2; the rating has a stable outlook. At the
same time, the short-term rating of the CP/MTN has
been reaffirmed at P1.
LMCB is primarily an investment-holding company; its
subsidiaries are involved in the manufacture and sale of
clinker, cement, aggregates and ready-mixed concrete,
as well as the distribution and trading of cement and
other building materials.
The rating upgrade is premised on LMCB‟s resilient and
consistently improving financial performance, sturdy
balance sheet and robust debt coverage. The Group‟s
strong credit profile is also underpinned by its position
as Malaysia‟s largest integrated cement manufacturer,
with access to international markets and favourable
corporate lineage as part of the larger Lafarge SA, which
affords it access to international distribution networks
and global expertise. This also represents an additional
take-up source for LMCB‟s cement – the Group is the
largest exporter in Malaysia. Meanwhile, the
liberalisation of cement prices in 2008 has also allowed
LMCB better flexibility in its pricing mechanism.
The AA3/P1 ratings of Gamuda’s Islamic securities
reaffirmed
RAM Ratings has reaffirmed the respective long- and
short-term ratings of AA3 and P1 for Gamuda Berhad‟s
(Gamuda or the Group) RM800 million Islamic Medium-
Term Notes Programme and RM100 million Islamic
Commercial Papers Programme; the long-term rating
has a stable outlook. Gamuda and its subsidiaries are
principally involved in civil engineering and construction,
property development, tolling operations and the
operation and maintenance of water-treatment plants.
The reaffirmation of the ratings is premised on
Gamuda‟s established standing within the construction
industry, both locally and overseas.
As at end-July 2009, the Group‟s outstanding
construction order book stayed healthy at RM6 billion,
which will see Gamuda through the medium term. “With
the anticipated pick-up in the local construction sector
this year and the planned infrastructure projects in
certain Middle Eastern countries, Gamuda is well poised
to secure some of these jobs, underscored by its strong
operating track record and sound financial profile,”
opines Shahina Azura Halip, RAM Ratings‟ Head of Real
Estate and Construction Ratings. Backed by its
prominent position as a property developer, Gamuda
also enjoys contributions from its established township
projects, as well as stable dividend income from its
mature concession assets such as Syarikat Pengeluar Air
Sungai Selangor Sdn Bhd (SPLASH) and Lingkaran Trans
Kota Sdn Bhd (Litrak); the latter will help buffer the
cyclical nature of the construction and property sectors.
However, we note that SPLASH may be sold under the
ongoing restructuring of the Malaysian water industry;
RAM Ratings will closely monitor the relevant
developments on this front.
On the other hand, the ratings are moderated by the
execution risk vis-à-vis the electrified double-track
railway project, the risks and uncertainties in relation to
the Group‟s foreign ventures, the cyclical nature of the
construction and property industries, expectations of a
higher gearing ratio and the regulatory risk faced by its
concession assets.
The AA3(bg)/P1(bg) ratings of BBN Development’s
Islamic debt facility reaffirmed
RAM Ratings has reaffirmed the respective long- and
short-term ratings of BBN Development Sdn Bhd‟s
(BBND or the Group) RM86 million Bank-Guaranteed
Murabahah Medium-Term Notes/Commercial Papers
Programme (2004/2011) (MMTN/MCP), at AA3(bg) and
P1(bg); the long-term rating has a stable outlook.
The ratings reflect the unconditional and irrevocable
guarantee extended by AmInvestment Bank Berhad
(AmInvestment), the financial institution ratings of
which were reaffirmed by RAM Ratings at AA3/P1 in
November 2009. Under this structure, all risks
associated with the MMTN/MCP are expected to be
absorbed by AmInvestment. The bank guarantee also
enhances the credit profile of the debt facility beyond
BBND‟s inherent or stand-alone credit risk.
5
An AA3/P1 corporate credit ratings assigned to
Saudi-based Dar Al-Arkan Real Estate
Development Company
RAM Ratings has assigned respective long- and short-
term corporate credit ratings of AA3 and P1 to Dar Al-
Arkan Real Estate Development Company (Dar Al-Arkan
or the Group); the long-term rating has a stable outlook.
Dar Al-Arkan is a property developer based in the
Kingdom of Saudi Arabia.
The ratings reflect Dar Al-Arkan‟s strong market position
within the Saudi Arabian property sector. Between 2002
and 2008, the Group had completed about 13 residential
projects in the kingdom‟s key cities of Riyadh, Makkah,
Jeddah, Medinah and Yanbu. The Group had also
consistently sold more than 1,000 acres of land each
year between 2006 and 2008, and an average of 1,100
units of residential properties per annum. Dar Al-Arkan
is currently one of the largest property developers in the
kingdom, and is also the largest developer listed on the
Saudi Stock Exchange (in terms of revenue and assets).
The Group‟s strong market position augurs well for its
future projects.
Meanwhile, prospects for Saudi Arabia‟s property sector
remain bright, underpinned by steady population growth
and healthy demographics, the kingdom‟s economic
growth (and consequently higher per capita income),
and the potential introduction of mortgage laws.
Driven by the healthy demand for properties in Saudi
Arabia, the Group posted double-digit revenue growth
between fiscal 2006 and 2008, with robust margins on
operating profit before depreciation, interest and tax
(OPBDIT) of 40% to 50% in the last 5 years. Moving
forward, Dar Al-Arkan‟s large tracts of land in Riyadh,
Jeddah, Dammam, Medinah and Makkah – which carried
a net book value of SR14.95 billion as at end-September
2009 – will sustain it over the longer term. These cities
are a hive of economic activity, being the kingdom‟s
capital and financial hubs, the gateway and home to the
world‟s holiest sites for the Muslim population, and the
industrial heart of Saudi oil fields.
The ratings are, however, moderated by Dar Al-Arkan‟s
exposure to the inherently cyclical nature of the
property sector, given the Group‟s lack of business
diversity. Any slowdown in Saudi Arabia‟s economy or
property sector is expected to have an adverse impact
on the Group‟s financial performance, although RAM
Ratings notes the strong fundamentals of the property
sector over the intermediate term. That said, Dar Al-
Arkan still faces geographical-concentration risk because
its activities are based entirely in Saudi Arabia. In
addition, the kingdom is exposed to geopolitical risks
6
that affect countries within the Gulf region; while we
note that Saudi Arabia has remained relatively sheltered
from such geopolitical upheavals to date, the threat of
war and/or terrorism on its shores cannot be discounted.
Meanwhile, Dar Al-Arkan shoulders a hefty debt burden,
compounded by a lumpy debt-maturity profile.
An AA1/P1 ratings assigned to CIMB Group
Holdings’ CP and MTN Programmes
RAM Ratings has assigned respective long- and short-
term ratings of AA1 and P1 to CIMB Group Holdings
Berhad‟s (CIMB Group Holdings or the Company) RM6.0
billion Conventional and Islamic Commercial Papers and
Medium-Term Notes Programmes (the CP and MTN
Programmes). The long-term rating has a stable
outlook.
The CP and MTN Programmes entail 4 issues: an up to
RM6.0 billion Conventional Commercial Papers
Programme (2007/2014), an up to RM6.0 billion
Conventional Medium-Term Notes Programme
(2007/2037), an up to RM6.0 billion Islamic Commercial
Papers Programme (2008/2015) and an up to RM6.0
billion Islamic Medium-Term Notes Programme
(2008/2038) - with a combined limit of RM6.0 billion.
RAM Ratings had, on 4 March 2010, assigned the
corporate credit rating of AA1/P1 to the Company and
the long-term rating of AA3 to its RM3.0 billion
Subordinated Notes (2009/2074). The long-term ratings
carry a stable outlook.
Wah Seong fully redeems RM200 million Islamic
debt facility
RAM Ratings has received confirmation that Wah Seong
Corporation Berhad (“Wah Seong”) has fully redeemed
and cancelled its RM200 million Murabahah and Ijarah
Commercial Papers/Medium-Term Notes Programme
(2004/2011). As such, RAM Ratings no longer has any
rating obligation on the said debt facility, and the AA3/P1
ratings are no longer applicable.
Binariang GSM partially redeems senior sukuk
RAM Ratings has received confirmation that Binariang
GSM Sdn Bhd (BGSM) partially redeemed RM3.77 billion
of its Senior Sukuk and prepaid USD1.10 billion of its
USD-denominated term loan on 25 February 2010,
pursuant to the requirements of the Senior Sukuk Trust
Deed dated 18 December 2007 and the USD Term Loan
Facility Agreement dated 19 December 2007.
BGSM‟s Islamic securities consist of a RM19 billion
Islamic Medium-Term Notes Programme (rated AA3, with
a stable outlook) and a RM2 billion Islamic Commercial
Papers Programme (rated P1) (collectively referred to as
the Senior Sukuk). In addition, BGSM also has a Ringgit
Malaysia equivalent of USD900 million Cumulative Non-
Convertible Islamic Junior Sukuk (rated A2, with a stable
outlook).
BGSM is an investment-holding company that is involved
in the Malaysian and Indian cellular telecommunication
markets via its wholly owned subsidiary, Maxis
Communications Bhd.
Muhibbah Engineering cancels Islamic CP/MTN,
makes variations on proposed sukuk
RAM Ratings has received confirmation from OCBC Bank
(Malaysia) Berhad - the facility agent for Muhibbah
Engineering (M) Berhad‟s (Muhibbah or the Group)
RM400 million Mudharabah Commercial Papers/Medium-
Term Notes (2008/2015) (Islamic CP/MTN) - that the
Group has cancelled its debt facility. There had been no
outstanding Islamic CP/MTN prior to the cancellation. As
such, the A1/P1 ratings of the Islamic CP/MTN are no
longer applicable.
Meanwhile, Muhibbah is in the process of making
variations to the terms and structure of its proposed
RM130 million Mudharabah Bonds with Detachable
Warrants of up to 5 years. We highlight that the A1
rating of the proposed bonds may be changed, pending
our review of the relevant documentation on these
variations. RAM Ratings will make the appropriate
announcement once these variations have been
finalised.
Suncity cancels RM250 million debt facility upon
maturity; RAM Ratings maintains surveillance on
remaining debt instruments
Sunway City Berhad‟s (Suncity) RM250 million
Commercial Papers/Medium-Term Notes Programme
(2002/2009) matured on 10 December 2009 and has
been cancelled; there was no outstanding CP or MTN as
of the same date. Following this, RAM Ratings no longer
has any rating obligation on the debt facility, and the
A2/P2 ratings are no longer applicable.
On the other hand, RAM Ratings will maintain
surveillance on the following:
i. The enhanced AAA(bg) rating of Series 1 and 3 of
Suncity‟s RM250 million Redeemable Bank-
Guaranteed Serial Bonds (2007/2010) (BG
Bonds), and the AA2(bg) rating of Series 2 and 4
of the BG Bonds; the long-term ratings have a
stable outlook. The enhanced ratings reflect the
unconditional and irrevocable guarantees extended
by OCBC Bank (Malaysia) Berhad to Series 1 and
3, and by RHB Bank Berhad to Series 2 and 4 of
the BG Bonds.
ii. The A2/P2 ratings of Suncity‟s RM500 million
Murabahah Commercial Papers/Medium-Term
Notes Programme (2007/2022); the long-term
rating has a stable outlook.
RAM Ratings sees no significant credit impact from
revocation of Pharmaniaga’s manufacturing
licence
RAM Ratings views that the recently announced
revocation of Pharmaniaga Manufacturing Berhad‟s
(“Pharma Manufacturing”) manufacturing licence -
effective 1 March 2010 - due to non-compliance issues
does not have a significant impact on Pharmaniaga
Berhad‟s (“Pharmaniaga” or “the Group”) credit profile
at this juncture. Pharmaniaga‟s RM60 million Islamic
Medium-Term Notes Programme (2005/2010) and RM40
million Islamic Commercial Papers Programme
(2005/2012) are currently rated AA2(s) (stable outlook)
and P1, respectively. To recap, Pharma Manufacturing is
a wholly owned subsidiary and manufacturing arm of
Pharmaniaga. The revocation of Pharma Manufacturing‟s
licence follows a routine audit by the Ministry of Health‟s
Pharmaceutical Services Division (“PSD”).
We believe that the revocation of the manufacturing
licence does not affect Pharmaniaga‟s ability to carry out
its obligations under its concession agreement with the
Government of Malaysia - for the purchase, storage and
distribution of certain pharmaceutical and medical
products to government hospitals. Although
Pharmaniaga‟s manufacturing division supplies about
10%-15% of its concession-related requirements, we
opine that the Group will be able to procure the needful
from its other suppliers.
Nonetheless, given that the manufacturing arm
contributes about 10% and 20% of Pharmaniaga‟s
revenue and operating profits, respectively, we expect
the revocation of the licence to have some impact on the
Group‟s financial performance. Based on RAM Ratings‟
projections, however, Pharmaniaga‟s financial metrics
would still meet the threshold for its current issue
ratings should the Group manage to have its licence
7
reinstated in the near future. In this regard, we
understand that the management is currently addressing
the issues highlighted by the PSD. Thus far, the
management has reported that they expect these issues
to be rectified within a relatively short time. RAM
Ratings is closely monitoring the developments vis-à-vis
Pharmaniaga, and will make an appropriate
announcement in due course.
RAM Ratings monitoring impact of global recalls on
Toyota Motor Japan, maintains negative outlook
on Toyota Capital
RAM Ratings has maintained the negative outlook on the
debt ratings of Toyota Capital Malaysia Sdn Bhd (Toyota
Capital or the Company), after factoring in the potential
impact of the worldwide recall of Toyota vehicles on
Toyota Motor Corporation of Japan (Toyota Motor Japan
or the Group), i.e. the ultimate shareholder of Toyota
Capital.
RAM Ratings had first placed Toyota Capital‟s debt
ratings on negative outlook on 28 January 2010,
premised on our concerns over Toyota Motor Japan‟s
future earnings due to the uncertainties surrounding the
economic recovery of its key markets - Japan, the
United States and Europe. The recent recalls of an
estimated 8.5 million Toyota cars have shaken
consumers‟ perception of Toyota Motor Japan as a
quality vehicle producer. As a result, RAM Ratings
expects the Group to incur a hefty cost for the recall and
envisage a fall in demand for Toyota vehicles, especially
Note: For further update, please refer to our press releases at www.ram.com.my
8
in the American market, hence delaying its turnaround
efforts in FYE 31 March 2010.
Despite the recalls, we believe that Toyota Motor Japan
has the financial muscle to weather this tough period,
underscored by its strong balance sheet. As at end-
March 2009, the Group‟s automotive division registered
a net gearing ratio of a mere 0.01 times. At the same
time, its financial-services division, which provides
financing to Toyota vehicle purchasers, maintained a
healthy net non-performing-loan ratio of 0.54%.
RAM Ratings will continue monitoring the impact of the
global recalls on Toyota Motor Japan. Should the Group
be able to exhibit sustainable improvement in its
earnings over the next few quarters, the outlook could
be reverted to stable. Otherwise, there would be further
downward pressure on the ratings of Toyota Capital‟s
debt instruments.
Toyota Capital‟s RM1 billion Islamic Commercial
Papers/Medium-Term Notes Programme (CP/MTN)
(2008/2015) currently carries AAA(s)/P1(s) ratings.
Meanwhile, the Company‟s RM1.2 billion MTN
Programme (2008/2018) and RM400 million MTN
Programme (2005/2012) are both rated AAA(s) while its
RM600 million CP Programme (2004/2011) is rated
P1(s). The enhanced debt ratings of Toyota Capital
reflect the guarantee that ultimately stems from Toyota
Motor Japan, which enhances the credit profiles of the
debt facilities beyond the Company‟s stand-alone credit
strength.
The Case of Wrongly Accused
A t the peak of the global credit crisis, Islamic
finance had been lauded as the saviour in the face
of the setbacks suffered by the conventional
markets. Lack of exposure to some of the more risky
markets where investors had fallen foul in the past had
rendered Islamic finance attractive. Therefore, market
players had perceived Islamic finance as a safe haven
amid the global credit crisis.
However, the impression had been short-lived. Investors
had been taken aback when the issuers of award-
winning sukuk such as the East Cameron Gas Sukuk,
Investment Dar and the Golden Belt Sukuk had
defaulted. The near-default of the Nakheel Sukuk had
added salt to the wound. Thanks to Abu Dhabi‟s last-
minute rescue, the looming default had been avoided.
The market, meanwhile, had been quick to point the
finger at Islamic finance as the reason for the debacle.
However, there is an urgent need to correct this
misperception. First of all, it is fundamentally wrong to
say that Islamic financial instruments such as sukuk
cannot fall into default just because Islamic finance is all
about ethical and moral finance.
What investors need to understand is that, like other
financial tools, these instruments are also exposed to
elements such as credit risk. Imagine that Mr A bought a
house through a conventional home-financing scheme
while Mr B opted for Islamic financing. While Mr B
diligently paid his monthly repayments, Mr A was
remiss. After some time, Mr A defaulted on his housing
loan because of his failure to meet the monthly
repayments. So, was the default triggered by the type
and structure of financing, i.e. conventional vs Islamic,
or was it because of Mr A‟s creditworthiness?
The same applies to the unfortunate sukuk that had
gone bad. Most, if not all, of the time, sukuk defaults
are a result of credit issues rather than structural or
Shariah concerns.
The epic of the fall
The global economic crisis had also given rise to the first
sukuk default in the Middle East, i.e. Investment Dar
and Saad‟s Golden Belt, followed by the Nakheel‟s
almost-defaulted USD3.52 billion Sukuk Ijarah. The
following section will delve deeper into the mechanism
behind the Nakheel sukuk.
For a start, Nakheel Sukuk is mired in a tangled web of
state-owned companies, which adds to the complexity of
the sukuk issue. The Dubai government wholly owns
Dubai World, which in turn holds 100% of Nakheel World
LLC. Nakheel World LLC is further divided into 3 smaller
holdings companies: Nakheel Holdings 1 LLC (“NH1”),
Nakheel Holdings 2 LLC (“NH2”) and Nakheel Holdings 3
LLC (“NH3”). Each of these owns 33% of Nakheel PJSC.
A special-purpose vehicle known as Nakheel
Development Limited (“NDL”) had been established to
issue sukuk certificates to investors in return for their
capital contributions.
NDL had then used the funds to buy 2 leasehold assets
from NH1. The assets comprised 2 strips of land - valued
at USD4.2 billion in 2006 - in the Dubai Waterfront area.
NDL, now the owner of the land, had leased it to NH2 for
a period of 3 years.
The lease payments received from NH2 would be
reflected in the periodic distributions on the sukuk. Half
of the lease amount would be paid to the sukuk holders
through Nakheel while the remainder would be deferred
until maturity. NH2 also promised to buy the land from
NDL upon the maturity of the lease or in the case of a
default. The whole transaction had been guaranteed by
Dubai World, NH1, NH2 and NH3.
There had also been additional protection for the sukuk
holders in the form of a pledge vis-à-vis 18.89% of
unlisted Nakheel stock and a mortgage over the
underlying assets. From the structure itself, it is clear
that the sukuk complies with the Shariah requirement to
have real underlying assets from which revenue can be
generated and shared with the sukuk holders. All in all,
the Nakheel sukuk had been structured in accordance
with the Shariah guidelines.
However, when the global financial turbulence hit the
Gulf countries, investors had started losing confidence in
the market. Private investments in commercial and
residential estates had dried up, particularly in Dubai -
leading to a sharp plunge in property prices. Dubai
property prices reportedly shrank 20% to 30% within 6
months; by the end of 2009, prices had plummeted
almost 60%. Most of the much-hyped developments in
Dubai had been either put on hold or shelved, including
the Palm Jebel Ali and Dubai Waterfront developments.
The crisis had also contributed to the failure of key
businesses, a decline in consumer wealth estimated at
9
trillions of US dollars, substantial financial commitments
incurred by governments, and a significant deceleration
in economic activity. Dubai World, with USD59 billion of
liabilities, had subsequently sought a “standstill”
agreement from its creditors; its debts had included
Nakheel‟s USD3.52 billion Sukuk Ijarah, due on 14
December 2009.
Who is to blame?
While the Ijarah structure complies with the Shariah
ruling of leasing real assets in return for revenue, the 2
idle strips of land had not generated any income for NH2
to honour its lease payments. Instead, NH2 had had to
utilise other funding sources to pay for the lease.
Therefore, when the property bubble burst, NH2 and
ultimately Dubai World had struggled to meet the lease
obligations; failure to do so would render the sukuk non-
performing.
Secondly, the underlying assets comprise 2 plots of land
in Dubai that, in fact, are merely empty strips of desert
land adjacent to the proposed Palm Jebel Ali and Dubai
Waterfront developments. The land was valued at
USD4.2 billion based on the development that were to
be constructed on it. The underlying assets had been
valued over a proposed development that would propel
the value of the surrounding area. Essentially, the
underlying assets are of little value until and unless
Nakheel Properties completes the proposed
developments there. With the nearby developments
having been shelved, the value of these 2 strips of
desert land backing the Nakheel Sukuk Ijarah has also
dwindled to almost nothing. So, what is there for the
sukuk holders to claim?
The assets fulfilled Shariah compliance in form but
lacked substance. Although there is a mortgage over the
land, it is uncertain how this may be enforced under
Dubai law as investors cannot have access to assets
owned by the government. On top of that, even though
Dubai World is a government-owned entity, the offering
circular explicitly states that the Dubai government will
not guarantee any debt or other liability of Dubai World.
There are many uncertainties surrounding the course of
action that investors may pursue on the various
guarantees and collateral vis-à-vis the Nakheel sukuk‟s
structure. In this regard, they seem to provide investors
with some comfort on more than just the unsecured
pledges of Nakheel and Dubai World. Then again, there
10
is much doubt on whether the guarantees and collateral
will end up being legally enforceable.
Case dismissed
For the most part, the Nakheel sukuk had been a
casualty of over-optimism in the Dubai property market.
The entire issuance had been based on the assumption
of a value for the underlying assets, assuming the
projects in the vicinity would be built within the next few
years. Some have questioned Shariah supervision over
the defaulted sukuk. But is Shariah supervision really an
issue? Shariah risk has never been a factor in the fall of
the Nakheel sukuk; instead, it has been more about the
ability of Nakheel to repay its sukuk holders (which in
turn depends on NH2 meeting the lease payments) and
Dubai World‟s ability in honouring its guarantee on the
sukuk.
The sukuk defaults are not similar to the defaults of the
collateralized debt obligations and mortage-backed
obligations in the sub-prime mortgage crisis, where
problems had been magnified by additional derivatives
written against the underlying loans. This is a relatively
straightforward problem of excessive leverage and the
failure of the underlying assets to generate sufficient
cashflow to repay the debts, but somewhat complicated
by its connection with a sovereign government. The
cause of Dubai World‟s crisis is not Islamic finance, but
over-leveraging. The default is more a consequence of
the economic difficulties in the Middle East, rather than
flaws in sukuk and Islamic finance per se.
Conclusion
Sukuk are understood to be safer than conventional
bonds as they theoretically transfer ownership of the
underlying assets to the sukuk holders, who in turn will
earn a return on holding that asset. This is regarded as
protection for the sukuk holders in case of default. Even
if the issuer defaults or goes bankrupt, investors should
be in a good position to recover much of their
contributions. Therefore, providing asset security or
corporate guarantees to investors is a legal issue that
affects both conventional and sukuk structures. It is
therefore not a question of Islamic versus conventional
finance.
And with that, case dismissed.
Sukuk Defaults – Local Flavours
S tanding true to Islamic teachings and virtues,
sukuk are perceived to be ethically and morally
protected from turning bad. However, when sukuk
defaults had been scrutinised by market practitioners
and academicians, concerns had been raised on the
reliability of their structures and Shariah supervision.
This has created the perception that sukuk may not be
any safer than conventional bonds in terms of investor
protection and the treatment of defaults.
From a rating perspective, it is very important to
evaluate how sukuk would behave in the case of default.
This can be done by ascertaining the salient features of
the sukuk; specifically, whether the issue is asset-based
or asset-backed. From there, investors will know their
position and protection if the sukuk turned bad. In most
asset-based sukuk, the asset is merely used to structure
the transaction and not transferred to the investors per
se. The sukuk investors therefore become unsecured
creditors via a purchase undertaking that requires the
issuer to repurchase the assets in the case of default.
In the case of asset-backed sukuk, the assets sold to the
special-purpose vehicle (“SPV”) are used to support the
sukuk and the investors have recourse to this asset,
i.e. the sale to the SPV protects them from the claims of
the issuer's other creditors.
However, it is also important to note that investors‟
protection varies depending on the Shariah structure
adopted; a sukuk transaction may not only be based on
one Shariah contract, but could comprise several
Shariah contracts in a single issuance. The more
common sukuk structures include Bai Bithaman Ajil,
Murabahah, Musharakah, Mudharabah and Ijarah.
Local sukuk defaults
Unlike the high-profile default cases in the Middle East,
Malaysia‟s sukuk defaults have received less criticism
and scrutiny from global industry players. This may be
due to our robust supervisory structure, established
governance and disclosure standards, and the highly
developed legal framework and court system which
provide the necessary protection and comfort to
investors.
According to the latest statistics by the
Securities Commission of Malaysia (“SC”),
the default rate for Malaysian sukuk only
came up to a relatively low 0.46% last year1.
1
Speech by YBhg Tan Sri Zarinah Anwar, Chairman of SC,
at the SC’s Annual Report 2009 Press Conference.
11
Table 1: Malaysian defaulted sukuk
Date of Initial Issuer Type of Sukuk Amount Rating Date of Final
Issuance Rating (RM mil) Agency Default* Rating
17 Apr 1997* A2 Hualon Corporation (M) Bai Bithaman Ajil 150 RAM 21 Nov 2003 D
Sdn Bhd Islamic Debt Ratings
Securities (“BaIDS”)
25 Jan 1999* BBB3 Johor Corporation Murabahah Islamic 500 RAM 27 June 2002 D
Debt Securities Ratings
21 Sept 2000* AID/ MARC-2ID Europlus Corporation Sdn BaIDS 250 MARC 10 Mar 2006 DID
Bhd
11 Dec 2000 BBB3 Moccis Trading Sdn Bhd BaIDS 50 RAM 3 June 2003 D
Ratings
22 Feb 2001* AID Maxisegar Sdn Bhd BaIDS 300 MARC 10 Mar 2006 DID
24 July 2003 MARC-3ID Perspektif Perkasa Sdn Bhd Murabahah 188 MARC 10 Mar 2006 DID
Underwritten Notes
Issuance Facility
(“MUNIF”)
19 Sept 2003 MARC-3ID Stenta Films (M) Sdn Bhd MUNIF 90 MARC 20 Sept 2007 DID
28 Nov 2003 AAID Malaysian Merchant Marine BaIDS 120 MARC 2 Apr 2010 DID
Berhad
30 Dec 2003 AID/ MARC-2ID Evermaster Berhad BaIDS & Murabahah 50 & MARC 31 Dec 2008 DID
Multi-Option Notes 40
Issuance Facility
1 Apr 2004 A+ID/ MARC- Pesaka Astana (M) Sdn BaIDS 200 MARC 30 Sept 2005 DID
1ID Bhd
9 July 2004 A+ID Ingress Sukuk Berhad Sukuk Ijarah 160 MARC 13 July 2009 DIS
7 Oct 2004 AID/ MARC-2ID Oilcorp Berhad Murabahah IMTN/ 70 MARC 7 Oct 2009 DID
MUNIF
19 Oct 2004 A3/P2 BSA International Berhad Murabahah CP/ MTN 150 RAM 28 May 2008 D
Ratings
4 Nov 2004* AID/ MARC-2ID Jana Niaga Sdn Bhd MUNIF 100 MARC 15 Nov 2007 DID
12 Nov 2004 A2/ P2 The Royal Mint of Malaysia Murabahah Multi- 55 RAM 8 June 2007 D
Sdn Bhd Option Notes Ratings
Issuance Facility
15 Dec 2004 AAID PSSB Ship Management BaIDS 40 MARC 15 Dec 2009 DID
Sdn Bhd
28 Jan 2005 AID Tracoma Holdings Berhad BaIDS 100 MARC 29 Jan 2009 DID
8 Mar 2005 MARC-2ID M-Trex Corporation Sdn Murabahah ICP 60 MARC 21 May 2009 DID
Mhd
29 Apr 2005 A1(s)/ P1(s) Oxbridge Height Sdn Bhd Murabahah IMTN/ 104/ RAM 6 Apr 2009 D
MUNIF 50 Ratings

26 Sept 2005 AID Englotechs Holding Bhd Murabahah MTN 50 MARC 27 Mar 2009 DID
28 Oct 2005 A2 Memory Tech Sdn Bhd BaIDS 320 RAM 7 June 2007 D
Ratings
31 Jan 2006 A+ID/ MARC- Nam Fatt Corporation Murabahah ICP/ 250 MARC 6 Apr 2010 DID
1ID Berhad IMTN
13 Apr 2007 MARC-1ID Straight A's Portfolio Sdn MUNIF 200 MARC 11 Dec 2009 DID
Bhd
17 May 2007 A+ID Malaysian International BaIDS 240 MARC 18 Nov 2009 DID
Tuna Port Sdn Bhd
* Date of issuance is based from press releases on rating agencies‟ website/ internal database.
Sources: RAM Ratings, MARC, SC

12
The following are some local sukuk default cases:
Memory Tech Sdn Bhd - RM320 million Bai Bithaman Ajil Islamic Debt Securities
BBA had been a popular Shariah contract for sukuk
when the Islamic capital market was first developed in
Malaysia. Due to some of the controversial elements
embedded in the structure, however, it is only accepted
in the Malaysian market. Under the BBA structure,
eligible sukuk investors will first purchase (from the
issuer) the underlying assets at an agreed purchase
price. The assets must be certified as Shariah-compliant
and of sufficient value, as per the pricing guidelines of
the SC‟s Shariah Advisory Council. The assets will
subsequently be sold back to the issuer at cost plus a
profit on deferred payment. Therefore, sukuk using the
BBA contract will be used to securitise Shariah-
compliant assets (either tangible assets or receivables);
it adds value to the debt facility, in terms of credibility
and liquidity.
Memory Tech Sdn Bhd (“Memory Tech”) is a wholly
owned subsidiary of Megan Media Holdings Berhad
(“MMHB”). MMHB is the largest contract-manufacturer
for optical data-storage media, e.g. recordable compact
discs (better known as CD-Rs) and recordable digital
versatile discs (more popularly termed as DVD-Rs), in
South-East Asia. MMHB‟s ability to cater to its clients‟
specific needs and its reputation as a reliable
manufacturer have earned it a prominent base of global
clients. Additionally, its location away from Taiwan
(where more than 60% of the world‟s CD-Rs and DVD-
Rs are produced) is viewed favourably by original-
equipment manufacturers, as this reduces their
exposure to single-country risk vis-à-vis supply. Memory
Tech‟s BaIDS had been fully backed by a corporate
guarantee from MMHB. As such, the rating had
essentially
mirrored the strength of MMHB‟s business and financial
profiles. RAM Ratings had assigned an initial long-term
rating of A2 to Memory Tech‟s RM320 million BaIDS
(2005/2012), with a stable outlook, in October 2005.In
early 2006, MMHB began showing signs of financial
distress due to its burgeoning debt load as a result of
aggressive capital spending. The additional borrowings,
which had been mainly used to pay deposits on
purchases of new machinery and as working capital, had
also augmented its ratio of total debt against earnings
before interest, tax, depreciation and amortisation. The
significant increase in MMHB‟s debt burden had resulted
in its non-compliance with 2 of the financial covenants in
the BaIDS‟s original trust deed. Furthermore, Memory
Tech and another subsidiary of MMHB in Singapore had
failed to repay their trade facilities amounting to
RM47.36 million, which fell due on 27 April 2007. Based
on the terms of the trust deed, this default on the trade
facilities had constituted a cross-default on the BaIDS.
According to MMHB‟s management, the inability of the
subsidiaries to meet their debt obligations had been
primarily due to a liquidity crunch arising from slow
collections from trade debtors. These trade receivables
had mainly stemmed from MMHB‟s trading business,
which had increased since RAM Ratings‟ review in
November 2006. After a series of downgrades, Memory
Tech‟s RM320 million BaIDS had eventually ended up
with a D rating.
13
Chart 1: Key transaction information and rating history of Memory Tech’s RM320 million BaIDS
Key Transaction Information
Issuer Memory Tech Sdn Bhd
Instrument RM320 million BaIDS
Issuance Date 28 October 2005
Islamic Contracts Bai Bithaman Ajil and Hibah
Underlying Asset Compact disc recordables (CD-
Rs)/ digital versatile disc
recordables (DVD-Rs)
production system custom-
made MTL-2LC (comprises a
system of machinery used in the
production of CD-Rs or DVD-Rs,
including plastic injection, dye
coating, sputtering, spin coating
and bonding)
Facility Agent Citibank Berhad
Shariah Advisor Dr Mohd Daud Bakar
Financial Advisor BinaFikir Sdn Bhd
Purpose of Issue Proceeds from the BaIDS had
been utilised for the following
purposes:
i) Repay amount due to
holding company, MMHB
ii) Refinance trade facilities
iii) Refinance bank borrowings
iv) Refinance hire-purchase
facilities
v) Finance acquisition of a
factory lot and renovation
Any remaining balance
after meeting items (i) to
(v) above could be used
as the Issuer‟s working
capital
Legal Counsel i) Adnan, Sundra & Low
ii) Lee Hishamuddin Allen &
Gledhill (only confined to
the proposed BBA Serial
Bonds restructuring)
Trustee Mayban Trustees Berhad
Initial Rating A2 by RAM Ratings
14
Rating History – Memory Tech Sdn Bhd
Assigned a long-term rating of A2,
11 October 2005 with a stable outlook. The BaIDS carry
a corporate guarantee from MMHB
Rating outlook revised from stable to
negative. The negative outlook
25 July 2006 reflects RAM Ratings’ concerns about
MMHB’s rising debts to support its
capital spending, and the prevailing
industry depression.
Reaffirmed A2 rating, maintained
negative outlook. The negative
outlook on the rating reflects RAM
2 October 2006 Ratings’ concerns about the Group’s
rising debts to support its capital
spending and the substantially volatile
nature of the industry.
Rating downgraded to C3; negative
outlook maintained. This was
premised upon the failure of Memory
Tech and MJC (Singapore) Pte Ltd
(another wholly owned subsidiary of
MMHB) to repay their trade facilities
9 May 2007
amounting to RM47.36 million, which
fell due on 27 April 2007. Based on
the terms of the trust deed, this
default on the trade facilities
constituted a cross-default on the
BaIDS. As a guarantor for the BaIDS,
MMHB had 30 days to remedy this
breach.
Rating downgraded from C3 (negative
outlook) to D, following the failure of
Memory Tech and MJC (Singapore)
Pte Ltd to repay their trade facilities.
On 30 May 2007, the trustee, acting
on the instructions of the BaIDS
holders, declared that an event of
default had occurred on the BaIDS.
Based on Clause 9.1 of the Trust
7 June 2007 Deed, the BaIDS had then become
immediately due and payable. On 5
June 2007, MMHB (as the guarantor
for the BaIDS) had also been served a
notice of demand by the trustee for
the payment of RM436.11 million
(comprising RM320 million and
RM116.11 million for the Primary and
Secondary Notes of the BaIDS,
respectively) by 6 June 2007. MMHB,
however, had failed to meet the
payment on the due date.
Tracoma Holdings Berhad - RM100 million Bai Bithaman Ajil Islamic Debt Securities
treated as an indication that the company was facing
Tracoma Holdings Berhad (“Tracoma”) is a an financial distress.
investment-holding company with a paid-up capital of
RM48 million2. It is involved in the manufacturing and
supply of automotive parts and components, the Chart 2: Key transaction information and rating
manufacture and assembly of motor vehicles, and history of Tracoma’s RM100 million BaIDS
maintenance and engineering services for the shipping
as well as oil and gas sectors. Key Transaction Information

The RM100 million BaIDS had been issued in 2 series of Issuer/Lessor Tracoma Holdings Berhad
RM50 million each, with tenures of 4 and 5 years.
Instrument RM100 million BaIDS

In November 2004, MARC assigned an initial rating of Issuance Date 28 January 2005
AID to the issue. This reflected, among others, Tracoma‟s
vast experience and good track record as one of the Islamic Contract Bai Bithaman Ajil
leading local manufacturers of automotive components
Affin Investment Bank Berhad
and its commendable financials. In October 2006, MARC Principal Advisor/
(previously known as Affin
placed Tracoma‟s RM100 million BaIDS on a negative Lead Arranger
Merchant Bank Berhad)
outlook, premised on Tracoma‟s delay (in accordance
with the terms and conditions of the BaIDS) in Shariah Advisor Dr Mohd Daud Bakar
depositing the monthly amount in the Profit Service
Account (“PSA”) required for the upcoming profit Purpose of Issue Proceeds from the BaIDS had
payments due in January 2007. been utilised for the following
purposes:
The balance in the PSA stood at RM347,726 as at 26 i) RM36.3 million to part-
September 2006, representing a shortfall of RM1.4 finance its subscription
million compared to the minimum requirement of RM1.8 for shares in PT Tracoma
million. Nevertheless, Tracoma could utilise the funds in Motors.
the Finance Service Reserve Account (“FSRA”) to make ii) RM5.0 million to finance
up for the shortfall in the PSA, to service the RM3.7 the acquisition of land
million of profit payments due in January 2007. As at 26 and building by PT
September 2006, the balance in the FSRA stood at Tracoma Nusantara.
RM3.89 million. Under the Trust Deed, Tracoma was iii) RM12.0 million to finance
required to replenish the amount utilised within 14 days the construction of a new
vis-a-vis the drawdown on the FSRA. On 29 January plant.
2007, MARC received confirmation from Pacific Trustees iv) RM22.0 million to repay
Berhad that Tracoma had successfully redeemed the bank borrowings or other
Secondary Notes of the BaIDS, due on 26 January 2007. financial obligations the
issuer and its subsidiaries
A couple of downgrades had been instituted during the (“Tracoma Group”).
annual rating reviews on the BaIDS, due to Tracoma‟s v) RM3.8 million to pre-fund
tight liquidity position and limited financial flexibility, the FSRA.
exacerbated by its weaker-than-expected vi) RM20.4 million to meet
the Tracoma Group‟s
cashflow. In late January 2009, MARC downgraded the working-capital
rating of the BaIDS to DID due to Tracoma‟s failure to requirements. For
redeem its first RM50 million series based on the original avoidance of doubt,
scheduled maturity date of 28 January 2009, as should the use of any
confirmed by the trustee. The missed payment had been amount for non–working-
capital purposes
marginally exceed the
allocated sum, then the
2
Tracoma’s Annual Report 2008, from Bursa Malaysia website

15
 amount allocated as Rating History – Tracoma Holdings Berhad
working capital should be
reduced accordingly. In
such an event, the
amount allocated for
non-working-capital
purposes should be
adjusted accordingly
vii) RM0.5 million to finance
the costs and expenses in
relation to the BaIDS.
Legal Counsel Zul Rafique & Partners
Facility Agent Affin Investment Bank Berhad
Trustee Pacific Trustee Berhad
Initial Rating AID by MARC
16
A long-term rating of AID was assigned based
on Tracoma’s vast experience and good
29 November 2004 track record as one of the leading local
automotive component manufacturer and
its commendable financial results.
Reaffirmed the long-term rating of AID, with
7 April 2006 developing outlook pending resolution of its
earlier joint venture with Proton in
Indonesia.
Placed on negative outlook, premised on
Tracoma’s delay (in accordance with the
Terms and Conditions of the BaIDS) to
3 October 2006 deposit the monthly built up in the Profit
Service Account (PSA) required for the
upcoming profit payments due in January
2007.
Downgraded the long-term rating to BBB+ID
and maintained the negative outlook.
Underpinned by the current negative
domestic automotive industry outlook
26 February 2007 reflecting weak industry fundamentals
which MARC believes will have an adverse
impact on Tracoma’s future operating and
financial performance
Reaffirmed the BBB+ID rating (negative
outlook). The MARCWatch Negative
placement reflects heightened concerns
about Tracoma’s ability to make a RM25
million scheduled payment into the principal
service reserve account (PSRA) on July 28,
25 July 2008 2008, which represents the first of six
scheduled monthly payments to build up the
PSRA for the redemption of the first series
of the BaIDS amounting to RM50 million
maturing on January 28, 2009. Thereafter,
Tracoma is required to make five monthly
payments of RM5 million each.
Downgraded the long-term rating to BB+ID,
maintained the negative outlook. The
downgrade reflects the company’s tight
liquidity position and limited financial
31 July 2008 flexibility, exacerbated by weaker-than-
expected cash flow generation as indicated
by Tracoma’s failure to make a scheduled
RM5 million payment into the PSRA on July
28, 2008 in accordance with the revised
schedule of build-up payments.
Downgraded the long-term rating to BID,
maintained the negative outlook. The
downgrade heightened concerns over
30 October 2008
Tracoma’s ability to redeem its first BaIDS
series maturing on January 28, 2009
amounting to RM50 million.
Downgraded the long-term rating to CID,
23 January 2009 maintained the negative outlook to reflect
our expectation that no payment will be
made on its first BaIDS series.
Downgraded the long-term rating to DID to
reflect reflects Tracoma’s failure to redeem
23 January 2009 its first BaIDS series and considered the
missed payment as an indication that the
company is facing financial distress.
Oxbridge Height Sdn Bhd - RM50 million Murabahah Underwritten Notes Issuance Facility and up
to RM104 million Islamic Medium-Term Notes Facility

The Murabahah Underwritten Notes Issuance Facility
(“MUNIF”) is a short-term note while the Islamic
Medium-Term Notes (“IMTN”) is a medium-term note.
The MUNIF/IMTN had adopted the underlying Shariah
principle of Murabahah, i.e. an agreement that refers to
a sale and purchase transaction for the financing of an
asset on a deferred-payment basis, with a pre-agreed
payment period and mark-up. The selling price of the
assets will include a profit margin.
of the delayed land sale, deferred property launches in
the last few years, reduced launches, sale cancellations,
construction hold-ups and increased construction costs -
thus triggering an event of default.
Chart 3: Key transaction information and rating
history of Oxbridge’s RM50 million MUNIF and
RM104 million IMTN

Oxbridge Height Sdn Bhd (“Oxbridge”) is a single- Key Transaction Information

purpose company set up to undertake the development Issuer Oxbridge Height Sdn Bhd
of Jaya Putra Perdana (“JPP”) in Tebrau, Johor. Oxbridge
is a subsidiary of Renewed Development Sdn Bhd, a RM50 million MUNIF and up to
Instrument
Johor-based property developer. JPP is located RM104 million IMTN
approximately 15 km to the north of Johor Bahru city
Issuance Date 29 April 2005
centre and is surrounded by more established
developments such as Taman Mount Austin and Taman Islamic Contracts Murabahah and Hibah
Daya.
Underlying Assets Identified project land
To facilitate the issuance, Tradewinds Corporation
Principal
Berhad (“Tradewinds”) - as the beneficial land owner –
Advisor/Lead
had voluntarily granted the identified assets to Oxbridge Amanah Short Deposits Berhad
Arranger/Facility
as a gift (hibah) for no consideration. The sukuk
Agent
investors had then acquired the assets from Oxbridge at
the purchase price. Thereafter, the sukuk investors had Joint Arranger OSK Securities Berhad
sold back the assets to Oxbridge at a price comprising
the original purchase price and a profit margin, at a pre- Shariah Advisor Dr Mohd Daud Bakar
agreed rate and on a deferred-payment basis. Once the Purpose of Issue Proceeds from the MUNIF had
sale and purchase transactions had been executed,
been utilised for the following
Oxbridge had subsequently given back the assets to
purposes:
Tradewinds, based on the concept of hibah. Oxbridge‟s
obligation to pay had been evidenced through the i) Direct payment of fees
issuance of the negotiable and non-profit-bearing and expenses relating to
promissory notes (“MUNIF Notes” or “IMTNs”) under the the issuance.
MUNIF and IMTN Facility, which it would redeem on the ii) To finance the
respective maturity dates. The issuance of the MUNIF construction,
Notes and IMTNs had been backed by various securities, development and
such as a first fixed legal third-party charge over the operating costs and
identified land parcels (equivalent to 418.64 acres) and expenses relating to JPP,
legal assignment of 20% of the proceeds from the sale Oxbridge‟s mixed-
of units under the JPP development. development project
developed in Mukim
In April 2005, RAM Ratings had accorded an initial long- Tebrau Daerah Johor
term rating of A1(s) (with a stable outlook) to the IMTN Bahru, Johor.
Facility of up to RM104 However, proceeds from the
IMTN had been utilised for the
following purposes:
million, and a short-term rating of P1(s) to the MUNIF of
i) To part-finance the
up to RM50 million. However, Oxbridge‟s business and
acquisition of the land
financial profiles had weakened in late 2008, as a result
development rights from

17
 Rating History – Oxbridge Height Sdn Bhd

A long-term rating of A1(s) with a

the beneficial land owner.
ii) To deposit into the FSRA
4.0% of each IMTN
issued
stable outlook was assigned to
12 April 2005 proposed IMTN of up RM104 million.
Simultaneously, a short-term rating of
P1(s) was assigned to proposed
MUNIF of up to RM50 million.

Legal Counsel Messrs Raslan Loong

Reaffirmed the long-term rating of
A1(s) with a stable outlook IMTN
Trustee AmTrustees Berhad
11 November 2005 facility of up RM104 million. At the
same time, a short-term rating of
Initial Ratings A1(s)/ P1(s) by RAM Ratings P1(s) was reaffirmed to MUNIF facility
of up to RM50 million.

Reaffirmed the enhanced long- and

short-term rating, and maintained the
18 March 2008 negative outlook. The negative
outlook reflects Oxbridge’s weakened
fundamentals following its deferred
and reduced launches.

Reaffirmed the enhanced long- and

short-term rating, and maintained the
negative outlook It premised on the
delays in the proposed sale of about
600 acres of land under its sister
5 November 2008 company, Hartaplus Realty Sdn Bhd,
for RM260 million - expected to
complete by 3Q 2008; part of the
proceeds is to be channelled to
Oxbridge to meet its working-capital
requirements.

Maintained the Rating Watch (with a

18 February 2009 negative outlook) on the A1(s)/P1(s)
ratings of Oxbridge’s IMTN/MUNIF.

Downgraded the ratings of Oxbridge’s

IMTN/MUNIF, from A1(s)/P1(s) to
BB1/NP. The rating downgrade
reflects the significant deterioration in
12 March 2009 Oxbridge’s business and financial
profiles as a result of the delayed land
sale, deferred property launches in
the last few years, reduced launches,
sales cancellation, construction hold-
ups and increased construction costs.

Downgraded the ratings of Oxbridge’s

IMTN/MUNIF, from BB1/NP to D. The
rating actions are premised on
confirmation from MIDF Amanah
Investment Bank Berhad’s
announcement through the FAST that
Oxbridge had failed to redeem the
6 April 2009 RM10 million Islamic Commercial
Paper under its MUNIF, which fell due
on 3 April 2009. Under Clause
12.1A(vii) of the Trust Deed for the
IMTN facility, any other indebtedness
that becomes due or capable of being
declared due before its stated
maturity will trigger a cross-default
and constitutes an event of default.
RAM Ratings understands that the
IMTN/MUNIF holders have not
declared an event of default,
premised on Oxbridge’s plans to
restructure the debt facility.

18
Oilcorp Berhad - RM70 million Murabahah Underwritten Notes Issuance/Islamic Medium-Term
Notes Facility

Oilcorp Berhad (“Oilcorp”) is an investment-holding fund account, which would fall due on 7 September
company; its subsidiaries are involved in 3 core 2009, and represented the balance of an upcoming
businesses: oil and gas; special projects, hotel, resort RM20 million redemption due on 7 October 2009 (i.e.
operation and property investment; and deep-sea the October redemption). Further rating downgraded
fishing. In September 2004, MARC had assigned initial had occurred due to the expectation of an imminent
ratings of MARC-2ID/AID to Oilcorp‟s RM70.0 million default on the October redemption, in addition to
MUNIF/IMTN, premised on its strong historical profit Oilcop‟s failure to pay profit on a loan under a CLO
performance and low gearing levels. However, this was programme. The missed profit payment could lead to
moderated by the sustainability of Oilcorp‟s revenue and the declaration of an event of default on the sukuk
profits after FY 2005, given that the company‟s existing programme.
contracts were expected to be fully completed in FY
2004 and FY 2005. The sukuk fell into default and was rated DID in October
2009, following Oilcorp‟s failure to meet its RM20 million
In 2006, the ratings were reaffirmed at MARC-2ID/AID. principal repayment based on its original scheduled
However, a year later, the long-term rating was redemption.
downgraded to A-ID, its short-term rating maintained at
MARC-2ID, underpinned by the Group‟s weakened Chart 4: Key transaction information and rating
financial profile, particularly the persistent deficit in net history of Oilcorp’s RM70 million MUNIF/IMTN
cashflow from operations due to higher receivables
arising from longer payment terms, its cashflow‟s Key Transaction Information
sensitivity to reductions in revenue and heftier
operating costs, and the need for additional borrowing to Issuer Oilcorp Berhad
support its core business activities: engineering, Instrument RM70 million MUNIF/ IMTN
procurement and construction; property investment;
and fisheries. MARC had also been concerned about the Issuance Date 7 October 2004
deficit in Oilcorp‟s cashflow arising from hefty
Islamic Contract Murabahah
receivables and lofty borrowings for its project, which
had outstripped the accumulation of its retained MIDF Amanah Investment Berhad
Principal Advisor/ Lead
(formerly known Amanah Short
earnings. Arranger
Deposits Berhad)

In March 2008, MARC placed the ratings on MARCWatch Shariah Advisor Dr Mohd Daud Bakar
with a developing outlook, following Oilcorp‟s Proceeds from the MUNIF/ IMTN had
announcement - dated 20 May 2008 - to Bursa Malaysia been utilised for the following
that its annual audited accounts for the year ended 31 purposes:
December 2007 would be amended due to a i) To refinance and repay the
disagreement between the management and its Purpose of Issue existing loan facilities of Oilcorp
auditors, Messrs Baker Tilly Monteiro Heng, on the and its subsidiaries (“the
accounting treatment relating to a RM110 million long- Group”).
term contract. About 4 months later, MARC revised the ii) As the capital expenditure of
outlook from developing to negative, due to a prolonged Oilcorp.
dispute that would affect Oilcorp‟s access to capital and
Legal Counsel Raslan Loong Advocates & Solicitors
which could result in its potential exposure to
disciplinary action by the regulators.
Facility Agent MIDF Amanah Investment Berhad
Due to further deterioration in the company‟s liquidity
OSK Trustees Berhad (formerly known
position, the ratings were Trustee
as OSK-Signet Trustees Berhad)
Initial Ratings MARC-2ID/AID by MARC
downgraded to MARC-4ID/BBID, while maintaining the
MARCWatch Negative. This was because Oilcorp had
failed to deposit RM10 million into the facility‟s sinking

19
Rating History – Oilcorp Berhad
The MARC-2ID/AID ratings were assigned.
14 September 2004
Reaffirmed the MARC-2ID/AID ratings.
17 February 2006
Downgraded the long-term rating from AID
to A-ID, and short term rating reaffirmed at
MARC-2ID with stable outlook. The rating
downgrade is underpinned by the Group’s
7 February 2007 weakened financial profile, in particular the
continuous deficit in net cash flow from
operations due to higher receivables arising
from longer milestone in payment terms,
sensitive cash flow towards reduction in
revenue and operating costs, and the need
of additional debt leverage going forward to
support its business activities.
Reaffirmed the ratings of MARC-2ID/A-ID
14 March 2008
Placed on MARCWatch developing following
Oilcorp’s announcement dated 20 May 2008
22 May 2008
to Bursa Malaysia that its annual audited
accounts for the year ended 31 December
2007 will be amended due to a
disagreement between management and its
auditors.
Revised its MARCWatch status to negative,
concerned that a prolonged dispute would
affect Oilcorp’s access to capital and may
30 July 2008 result in potential exposure to disciplinary
action by the regulators.
Maintained its rating at MARCWatch
31 October 2008 negative.
Continue to maintain its rating at
20 February 2009 MARCWatch negative due to a protracted
delay in releasing audited accounts for the
FY2007.
Continued MARCWatch negative placement
5 June 2009 highlights Oilcorp’s thin liquidity cushion
relative to its significant upcoming debt
maturity in October 2009.
Downgraded the ratings to MARC-4ID/BBID,
and maintained MARCWatch negative due
11 September 2009
to the company’s liquidity position which
had deteriorated further, and incorporated
Oilcorp’s increasingly limited options to
stabilise its credit profile. Oilcorp failed to
deposit RM10 million into the facility’s
sinking fund account.
Downgraded the ratings to MARC-4ID/CID
30 September 2009
and maintained MARCWatch negative in
expectation of imminent default by Oilcorp
on its upcoming redemption of its
MUNIF/IMTN on October 7, 2009 under the
facility’s original redemption schedule.
7 October 2009 Downgraded DID on missed principal
payment.
20
Ingress Sukuk Berhad - RM160 million Sukuk
Ijarah
Ingress Sukuk Berhad (“ISB”) had been incorporated by
its holding company, Ingress Corporation Berhad
(“Ingress”), as a special-purpose vehicle to facilitate the
execution of the sale and leaseback of Ingress‟ identified
assets for the Sukuk Ijarah issuance.
Ijarah is a manfa’ah (usufruct) type of contract, where
the owner leases out an asset to a client, at an agreed
rental fee and pre-determined lease period, as per the
„aqd (contract). Normally, the ownership of the leased
asset remains in the hands of the lessor. As per the
structure, the sukuk holders possess undivided
proportionate beneficial ownership of the assets and the
rights, titles, interests and benefits under all the
transaction documents. In addition, a purchase and sale
undertaking is exercisable by both Ingress and ISB for
the redemption of the sukuk upon the maturity of the
issuance, or upon the occurrence of a dissolution event
or an event of default vis-à-vis repaying any outstanding
balance.
In June 2004, MARC assigned an initial rating of A+IS to
ISB‟s proposed RM160.0 million Sukuk Ijarah. The rating
reflected Ingress‟ track record as one of the leading local
automotive-component manufacturers, with a diversified
customer profile and geographical distribution; and its
above-average financial results, characterised by its
favourable operating margins. Moderating factors
included the vulnerability of the automotive industry and
the manufacturing sector to economic swings and
increasing competition arising from trade liberalisation.
In July 2007, MARC placed the rating on MARCWatch
Developing, following confirmation from CIMB Trustee
Berhad that a breach in the debt-to-equity ratio had
occurred based on Ingress‟ audited accounts for the
financial year ended 31 January 2007. At the end of the
year, MARC lowered ISB‟s rating to AIS, with a stable
outlook.
In April 2008, MARC revised the outlook to MARCWatch
developing, following ISB‟ announcement (dated 10 April
2008) to Bursa Malaysia in response to a notice by CIMB
Trustee Berhad for non-compliance of financial
covenants under the sukuk issuance. According to the
Ijarah Agreement, ISB was required to rectify its non-
compliance of the covenants within 3 months from the
date of the notice. Three months later, MARC maintained
the MARCWatch developing following an extension of the
remedy period given to ISB until 26 July 2008 - to
resolve the breach of certain financial covenants under
the Ijarah Agreement. However, ISBhad failed to rectify
the breaches and also failed to conclude a refinancing
scheme in relation to the sukuk. MARC had thus revised documentary evidence
the MARCWatch to negative. satisfactory to the
arrangers.
After a couple of downgrades due to ISB‟s deteriorating ii) To finance the
liquidity position, MARC had eventually downgraded the construction,
rating to BB-IS, but retained the MARCWatch Negative. development and
ISB had failed to make a RM25 million payment into the operating costs and
Ijarah Service Rental Account (“ISRA”) by the deadline expenses relating to
of 9 April 2009. On 6 July 2009, MARC lowered the JPP, Oxbridge‟s mixed-
rating to CIS and maintained the MARCWatch Negative. development project to
The rating action was based on ISB‟s decision to be developed in Mukim
postpone RM45.0 million of the RM50.0 million payment Tebrau Daerah Johor
on the first tranche of the sukuk, which would become Bahru, Johor Darul
due on 9 July 2009. Takzim.

On 13 July 2009, ISB defaulted on its RM160 million i) Mohamed Ismail & Co,
Sukuk Ijarah; MARC downgraded the rating from CIS to counsel for the Principal
DIS, even though ISB had confirmed that it had made a Legal Counsels Advisor/Lead Arranger.
partial payment of RM5 million on 9 July 2009, in line ii) Azmi & Associates,
with its earlier agreement with the sukuk holders. The counsel for Ingress.
payment date of the remaining RM45 million - due on 9 i) ISB as the initial trustee
July 2009 – had been deferred to 9 January 2010 (with ii) Bumiputra-Commerce
the agreement of the majority of the sukuk holders), to Trustees Trustee Berhad as co-
allow the Group to complete its group-wide restructuring trustee
plan.
Initial Rating A+IS by MARC
Chart 5: Key transaction information and rating
history of ISB’s RM160 million Sukuk Ijarah
Rating History – Ingress Sukuk Berhad
Key Transaction Information
8 June 2004 A long-term rating of AIS was assigned.
Issuer Ingress Sukuk Berhad

Instrument RM160 million Sukuk Ijarah

8 December 2005 Reaffirmed the long-term rating of AIS.
Issuance Date 9 July 2004

Islamic Contract Ijarah

12 October 2006 Reaffirmed the long-term rating of AIS
Principal Advisor/Lead with stable outlook.
HSBC Bank Malaysia Berhad
Arranger/Facility
(“HSBC”)
Agent
Placed its A+IS rating on MARCWatch
Service Agent/Lessee Ingress Corporation Berhad Developing, followed confirmation
from CIMB Trustee Berhad that a
31 July 2007
breach in the Debt to Equity Ratio had
Lessor Ingress Sukuk Berhad
occurred based on Ingress’ audited
accounts for the FY2007.
Shariah Advisor Dr Mohd Daud Bakar

Purpose of Issue Proceeds from the Sukuk

Ijarah had been utilised for 30 October 2007 Maintained A+IS rating with
developing outlook,
the following purposes:

i) Direct payment of fees

and expenses relating
to the issuance of the
facility to relevant
parties, based on the
invoices or such other

21
Rating History – Ingress Sukuk Berhad
Lowered the rating to AIS (stable
outlook). The downgraded rating reflects
Ingress’ deteriorating profitability and
the breach of its debt-to-equity
28 December 2007
covenant, resulting from additional debt
assumed to fund its substantial capital
expenditure in respect of its Thailand
operations.
As clearly highlighted in the preceding cases, the
reasons behind the defaults have nothing to do with the
Shariah structure. Rather, they were related to the
impact from adverse market conditions and economic
situation that had led to financial distress. Nevertheless,
it is worth noting that sukuk investors had been
adequately informed of the issuers‟ status and progress
via the annual rating reviews conducted by the
respective rating agencies.

Placed MARCWatch developing,

following Ingress’ announcement dated
11 April 2008 April 10, 2008 to Bursa Malaysia in
response to a notice by CIMB Trustee
Berhad for non-compliance of financial
covenants under the sukuk issuance.
Maintained A+IS rating with developing
11 July 2008
outlook,
Revised its MARCWatch placement to
negative outlook following Ingress’
28 July 2008 failure to rectify the breach in certain
financial covenants under the Ijarah
Agreement.
Downgraded to A-IS with negative
outlook, incorporated the deteriorating
25 February 2009 liquidity position and declining
profitability of Ingress and continuing
existing non-compliance with certain
financial covenants.
Law and Order
Like the Middle East, Malaysia has also had its fair share
of defaulted sukuk, albeit with a lower issuance value.
Nonetheless, what have protected Malaysia from the
negative limelight are the tight regulations and laws that
bind the sukuk market. Both sukuk and conventional
bonds are governed by similar standards, guidelines and
laws that issuers have to abide by. Sukuk are therefore
considered as financial obligations, whereby the
investors are recognised as creditors and rank equally
with other conventional creditors. This provides some
level of comfort to investors, knowing that they are
adequately protected in any unfavourable event.
Malaysia conforms to consistent and clear investors
protection whereby the investors are well aware of their
position and options. While the investor protection are
very much intact and market-tested, the legal and
recovery process are also in order.

Apart from being well-regulated by various standards

Downgraded to BBB-IS rating with and guidelines, Malaysia is also the only country that
negative outlook due to Ingress’ makes it compulsory for all tradable corporate debt
insufficient liquidity resources as well as
securities to be rated - to enhance investors‟ confidence
31 March 2009 the lack of positive developments with
regard to its refinancing initiatives and and assist in the investment decision-making process.
asset disposals vis-à-vis its upcoming
scheduled RM50 million sukuk
redemption in 9 July 2009. Another distinguishing factor for the Malaysian sukuk
market is the establishment of a centralised, national-
level Shariah supervisory board, which ensures that
Lowered its rating to BB-IS, maintained every sukuk issued in Malaysia fully complies with the
negative outlook. ISB has failed to make
10 April 2009 a RM25 million payment into the Ijarah
Shariah. All these factors provide sufficient protection to
Service Rental Account within the investors in the sukuk and conventional bond markets.
required deadline.

Downgraded to CIS, with negative

outlook, based on ISB’s decision to
6 July 2009 postpone RM45.0 million of the RM50.0
million upcoming first tranche sukuk
payment.

Downgraded to DIS, on missed principal

13 July 2009
payment.

22
Setting the Risk Assessment of Sukuk in Perspective ~ Focus
on Debt-Based Sukuk

In essence, a credit rating reflects a rating agency’s opinion of the creditworthiness of a

particular debt security or obligation. However, with the proliferation of sukuk, public and private
commentaries seem to suggest that the credit ratings assigned to sukuk also imply that the bonds
are Shariah-compliant from the rating agencies’ viewpoint. This is a misconception about the
roles and functions of ratings and credit rating agencies. Basically, credit ratings relate only to
credit risks and, therefore, have no bearing on the issue of compliance with Shariah principles.

The Misconception
Ratings have been used in a wide range of functions,
becoming tools employed by issuers, investors,
intermediaries, securities analysts, regulators,
counterparties to financial and commercial contracts,
among others. Each user group has its specific purpose
and objective. For example, issuers seek credit ratings
because of market or regulatory demands; as such,
issuers would like higher ratings and greater control
over the rating process. Parties on the buy side, such as
insurance companies and pension funds, use ratings to
satisfy certain requirements of their portfolios and as
governance guidelines; they therefore would prefer
stable ratings and tend to frown upon rating changes.
There is, of course, the incorporation of ratings as a
regulatory tool in terms of banks and insurance
companies, among others.
Given the multiple roles, it is not surprising that ratings
have been subjected to varied interpretations,
perhaps at times incompatible with the stated purpose
of ratings. A possible case in point is the common
misconception that the credit ratings assigned by rating
agencies to sukuk also mean their seal of approval that
the securities are Shariah-compliant. This is certainly
not among the intended roles and functions of ratings
and rating agencies.
Credit ratings relate only to credit risks and, therefore,
have no bearing on the issue of
compliance with Shariah principles. In Malaysia, the
Securities Commission (“SC”) –
as the regulatory body for the capital market - has the
task of ascertaining the conformity of an Islamic
instrument to Shariah principles and, finally, approving
the instrument as indeed being Shariah-compliant.
The principles and concepts that are approved for the
issuance of sukuk are set out in the SC‟s Guidelines on
the Offering of Islamic Securities (“IS Guidelines”). The
IS Guidelines cover different aspects, including the need
to seek SC‟s approval for an issuance of sukuk; the
persons who are eligible to act as principal advisors for
different types of proposals; the documents and
information required to be submitted; the persons who
are eligible to be issuers; other requirements such as
the appointment of Shariah advisors, rating,
underwriting and disclosure requirements; the mode of
issue and the utilisation of proceeds; and the time frame
for approval from the SC.
Practically, the fundamental Shariah principles and
concepts that underpin the instruments would need to
have been pre-determined and, where necessary,
verified by the relevant Shariah councils as these
aspects would determine the structures, mechanisms
and salient terms of the instruments to be subjected to
credit ratings. In fact, these regulatory-approved
principles or concepts determine the names or types of
sukuk that are in the market today.

23
Figure 1: Issuance of Bai' Bithaman Ajil Islamic Debt Securities (“BaIDS”) - schematic presentation

Seller (role typically assumed
by the Primary Subscriber(s))
and Issuer identify asset for
purpose of buying and selling
(i.e. a sale contract) under
the principles of BBA.
On bought-deal basis, the
Primary Subscriber(s)
purchases the asset with
cash, at the Purchase Price.
The same asset will then be
resold to the Issuer by the
Primary Subscriber(s) at the
Selling Price (Purchase Price +
Profit Margin) on deferred
payment sale (BBA).
To meet the payment
obligation arising out of the
BBA contract, the Issuer
issues sukuk (BaIDS)
equivalent to the total Selling
Price. The BaIDS confirms the
right of the holder to
payment of the sale price.

Origination of Debt–Based Sukuk Rating Framework of Debt-Based Sukuk in

In most instances, sukuk in the Malaysian debt market
are raised pursuant to a contract of sale3; the most
common are those based on the principles of Bai
Bithaman Ajil (“BBA”) and Bai Murabahah
(“Murabahah”). As may be seen from the schematic
presentation above (Figure 1), the sale contract entered
into between the Issuer and the Seller4 consequently
results in an 'IOU' on the part of the Issuer. The Issuer
then undertakes an Islamic bond issue, matching the
indebtedness which has arisen from the BBA transaction.
The bonds indicate the Issuer's obligation to pay their
face value5 and the right of the sukukholders to receive
payments. As one may appreciate, the subsequent issue
now would be the credit risk of the Issuer.
Brief
RAM Ratings‟ ratings are arrived at through a rigorous
and judicious process that tends to favour long-term
considerations and rating stability over transitory
conditions. The assessment of creditworthiness and the
ultimate assignment of a rating depend on various
factors, taken in aggregate.
In the appraisal of sukuk, our rating methodology
incorporates vigorous scrutiny of the pertinent aspects
of the bond structure which affirm the instrument as an
Islamic investment. This is to ensure that any ensuing
risks and implications that may affect the credit risk
profile of the sukuk have been taken into consideration.

Factors assessed include the underlying principles or

An issue rating for a debt-based sukuk is RAM Ratings‟
concepts, the form and structure of the proposed
opinions on the creditworthiness of a particular debt- instrument (including any embedded credit
based sukuk. It reflects the overall capacity and enhancements), as well as the process, mechanism and
willingness of an issuer to meet the financial obligations documentation. Over and above these factors, our
on a particular debt-based sukuk on a full and timely ratings for sukuk are also based on the analysis of
basis, taking into account its expressed terms and macro-economic data, industry- and company-specific
conditions. RAM Ratings‟ sukuk ratings are, however, elements that may affect the company's operating
not a measure of compliance with Shariah principles or environment, the robustness of its projected cashflow
the role, formation, practices, legitimacy and soundness and key financial parameters, as well as the
management‟s goals and strategies, corporate
of the Shariah advisors‟ recommendations and decisions.
philosophy and succession plans.

3
Contract of sale is the main contract of exchange in Islamic
commercial law.
4
The role of Primary Subscriber is typically performed by the
Arranger.
5
The face value of the Islamic bonds is equivalent to the total
Selling Price, made up of the original purchase price plus the
profit margin.

24
 Market Statistics

Malaysian Islamic
Capital Market

Malaysian Rated Corporate Sukuk Market

League Table of Lead Managers as at 31 March 2010

RM Million %

CIMB Investment Bank Berhad 600 71.4%

Maybank Investment Bank Berhad 240 28.6%

840 100%

The value of consortium issues have been equally divided by the number of lead managers of a consortium

Source : RAM Ratings/ FAST

The latest sukuk issuance arranged by these arrangers are Naim Holdings Berhad (Sukuk Murabahah/ Musharakah of
RM600m) and Haluan Gigih Sdn Bhd (Sukuk Musharakah of RM240m) respectively.

25
 Market Statistics

Malaysian Islamic
Capital Market

Issued Sovereign & Corporate Bonds

Gross figures ( not inclusive of redemptions)

RM Million As end Feb

Instruments 2006 2007 2008 2009 2010

Malaysian Government Securities 26,830.0 43,187.4 44,618.5 61,295.0 9,065.0

Khazanah Bonds 2,000.0 524.4 - - -
Government Investment Issues 9,500.0 10,000.1 16,500.0 28,500.0 3,000.0
Malaysia Savings Bonds - - 1,483.1 7,000.0 -
Cagamas Bonds 6,950.0 1,750.0 541.0 - -
Total Sovereign & Near-Sovereign (1) 45,280.0 55,461.8 63,142.6 96,795.0 12,065.0

Straight Bonds 8,667.1 7,008.4 17,477.4 10,847.0 -

Bonds with warrants - - - - -
Convertible Bonds 155.8 30.8 846.9 612.0 42.0
Islamic Bonds 4,780.6 12,127.0 7,467.5 3,785.0 -
Asset Backed Bonds * 1,545.9 4,005.0 1,300.0 97.0 100.0
Medium Term Notes * 16,587.5 41,766.0 26,068.0 43,234.0 1,064.0
Total Corporate Issues (2) 31,736.9 64,937.2 53,159.9 58,575.0 1,206.0

Total Bonds Issued (1 + 2) 77,016.9 120,399.0 116,302.4 155,370.0 13,271.0

Proportion of Total Bonds Issued (%):

Sovereign & Near Sovereign 58.8 46.1 54.3 62.3 90.9
Corporate Issues 41.2 53.9 45.7 37.7 9.1

Note:
* Includes Islamic issues - no breakdown available
Source: BNM

As at end-February 2010, the total sovereign, near-sovereign and corporate bonds and sukuk issued amounted to RM13.27
billion.

Corporate bonds and sukuk only contributed about 9% of the total bond market share.

For the month of February, new issues of debt securities in the capital market was lower at RM4.4 billion (January 2010:
RM8.9 billion). The bulk of the issuance was from the public sector i.e. gross issuance of RM3.5 billion from a 5.5 year
Malaysian Government Securities (MGS).

26
 Market Statistics

Malaysian Islamic
Capital Market

Outstanding Bonds (RM Million) As at end 2008 As at end 2009 As at end March 2010
Source: Bank Negara Malaysia Conventional Islamic Conventional Islamic Conventional Islamic
Asset Backed Securities 11,028 6,169 9,781 5,921 96,554 5,839
Asset Backed Securities (Commercial Papers) - - - - - -
Asset Backed Securities (MTN/IMTN) 1,562 - 2,023 - 1,990 -
Bonds 60,991 71,822 61,641 71,462 61,793 72,280
Medium Term Notes 28,209 67,668 39,979 88,350 41,003 84,361
Commercial Papers 3,827 5,308 3,932 3,723 3,328 3,959
Commercial Papers-CPN 4,850 580 300 307 200 300
Loan Notes 857 - 17 - 17 -
Loan Stocks 8,899 - 8,695 58 8,269 58
Total Corporate Issues 120,223 151,546 126,368 169,820 213,154 166,796
Aggregate Corporate Issues 271,770 296,187 379,951
Bank Negara Bills/Negotiable Notes - - - - - -
Bank Negara Monetary Notes-CB - - - - - -
Bank Negara Monetary Notes-DB/IDB/IDM 30,700 7,300 21,600 8,000 25,650 6,400
Bank Negara Monetary Notes-IPB - 1,000 - - - -
Bank Negara Monetary Notes-NF 3,000 - - - - -
Cagamas Bonds 3,435 - 1,805 - 980 -
Cagamas Notes - - - - - -
Cagamas Notes-CPN - - - - - -
Danaharta Bonds - - - - - -
Danamodal Bonds - - - - - -
Khazanah Bonds 1,000 3,350 1,000 1,000 1,000 -
Government Investment Issues - 42,500 - 66,000 - 69,000
Islamic Cagamas Papers - 2,925 - 1,465 - 725
Sukuk Bank Negara Malaysia Ijarah - 400 - 400 - 400
Malaysian Government Securities 211,801 - 240,770 - 253,270 -
Malaysian Government Securities Callable 2,000 - 1,500 - 1,500 -
Malaysian Treasury Bills 2,320 2,000 2,320 2,000 2,320 2,000
Total Sovereign & Near – Sovereign Issues 254,256 59,475 268,995 78,865 284,720 78,525
Total Debt Securities 374,480 211,021 395,363 248,685 497,875 245,321
AGGREGATE 585,501 644,048 743,196

Sukuk outstanding as the end of March 2010 amounted to RM245.3 billion compared with RM248.7 billion as at end- 2009.

The percentage of outstanding sukuk to total outstanding corporate bonds decreased from 39% in 2009 to 33% at the end
of March 2010.

27
Market Statistics
 Market Statistics

Malaysian Islamic
Capital Market

Corporate Sukuk Market Issued & Rated by Economic Sector Corporate Sukuk Market Issued & Rated by Economic Sector
as at March 2010 (by number of issues) as at March 2010 (by value)

Diversified holdings Asset-backed

Public Finance 4% Financial services securities
Asset-backed 1% Infrastructure &
6% 4%
securities Mining & petroleum utilities
11% 2% Plantation & 46%
agriculture Public Finance
Infrastructure &
9% 0%
utilities
Consumer products Trading & services
24%
1% 5%
Diversified holdings
10%
Industrial products Transportation
13% 1% Financial services
Trading & services 15%
Construction & Property & real
6% Transportation Property & real engineering estate Mining & petroleum
3% 10% Construction & Plantation &
estate 4% 1%
engineering agriculture
16%
2% 1%
Industrial products
Total number of issues = 498 4%
Consumer products Total value = RM309 billion
Source : RAM Ratings 1% Source : RAM Ratings

Corporate Sukuk Market Issued & Rated by Financing Contract Corporate Sukuk Market Issued & Rated by Financing Contract
as at March 2010 (by number of issues) as at March 2010 (by value)

BBA
29% Bai Al-Dayn
Bai Al-Dayn Musharakah BBA
1%
1% 36% 22%
Murabahah
34%
Musharakah
11%

Mudharabah Murabahah
Mudharabah 1% 27%
2% Istisna
Ijarah Ijarah
3%
20% 7% Istisna
6%
Total number of issues = 498 Total value = RM309 billion
Source : RAM Ratings Source : RAM Ratings

As at end of March 2010, majority of the sukuk issued issued in the market were from the infrastructure and utilities sector
which commands 24% of the total issuances. More than half of the total bonds in terms of number of issues and value from
this sector were Shariah-compliant.

For the first quarter of 2010, the number of corporate sukuk issued and rated increased by 50% q-o-q to 3 issuances.
Nonetheless the sukuk value declined by 97% to RM840 million for the same period.

Sukuk issued in 1Q10 were only those using Murabahah and Musharakah concept but we believe there will be more sukuk
adopting other contracts that will be issued in the 2nd half of 2010.

28
 Market Statistics

Sukuk Rated By
RAM Ratings

RAM Ratings-Rated Sukuk (long-term) RAM Ratings-Rated Sukuk (long-term)

as at March 2010 (by number of issues) as at March 2010 (by value)
B C
2.2% 0.4% B
BB D BB C
1.1%
1.5% 0.0% BBB 0.2% 0.1% D
BBB AAA
0.7% 0.0%
5.8% 21.1% A
13.9% AAA
44.6%

A AA AA
33.8% 35.3% 39.5%

Total number of issues = 275 Total value = RM241 billion

Source : RAM Ratings Source : RAM Ratings

RAM Ratings-Rated Sukuk (short-term) RAM Ratings-Rated Sukuk (short-term)

as at March 2010 (by number of issues) as at March 2010 (by value)

NP P3
0.5% NP
P3 14.3% P2 2.0%
7.1% 7.8%

P1
46.4%

P2
32.1%

P1
89.7%

Total number of issues = 28 Total value = RM17 billion

Source : RAM Ratings Source : RAM Ratings

The bulk of long-term sukuk rated by RAM Ratings are assigned AA (35%) and AAA (21%) ratings.

29
Market Statistics
 Ringgit Sukuk Market Report

Sukuk - Total Traded Amount for the Quarter ended 31 March 2010

Sukuk - Total Sukuk Outstanding (RM mil) by Class: 31 March 2010

Sukuk New Facilities created for the Quarter ended 31-Mar-2010

Facility Code Facility Name Instrument Maturity Date Facility Limit

201000002 NAIM RM500.0M IMTN PROGRAMME MTN 18-Mar-25 500,000,000

201000007 HGSB RM240.0M 10YRS IMTN MTN 30-Mar-20 240,000,000

201000003 NAIM RM100.0M ICP PROGRAMME CP 17-Mar-17 100,000,000

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for trading purposes.
None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd (formerly Bondweb Malaysia Sdn
Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any
security or investment. Investors are advised to consult their professional investment advisors before making any investment decision. Materials provided on this
page are provided on an "as is" basis, and while care has been taken to ensure the accuracy and reliability of the information provided in this page, BPAM provides
no warranties or representations of any kind, either express or implied, including, but not limited to, warranties of title or implied warranties of fitness for a
particular purpose, accuracy, correctness, non-infringement, timeliness, completeness, or that the information is always up-to-date.

30
Top 10 Sukuk Tender Result for the Quarter ending 31-Mar-2010

Issue Maturity Successful Successful

Stock Name Actual Issue
Date Date Yield Price

PROFIT-BASED GII 2/2010 30.09.2015 31-Mar-10 30-Sep-15 3500 3.860 99.999

PROFIT-BASED GII 1/2010 15.07.2013 15-Jan-10 15-Jul-13 3000 3.288 99.998

BNMN-IDM 11/2010 182D 23.09.2010 25-Mar-10 23-Sep-10 1000 2.538 98.750

BNMN-IDM 10/2010 91D 17.06.2010 18-Mar-10 17-Jun-10 1000 2.191 99.457

BNMN-IDM 9/2010 63D 13.05.2010 11-Mar-10 13-May-10 1000 2.161 99.628

BNMN-IDM 5/2010 63D 08.04.2010 4-Feb-10 8-Apr-10 1000 2.157 99.629

BNMN-IDM 2/2010 63D 18.03.2010 14-Jan-10 18-Mar-10 1000 1.877 99.677

BNMN-IDM 12/2010 364D 29.03.2011 30-Mar-10 29-Mar-11 500 2.675 97.402

BNMN-IDM 7/2010 63D 29.04.2010 25-Feb-10 29-Apr-10 500 2.082 99.642

BNMN-IDM 4/2010 91D 29.04.2010 28-Jan-10 29-Apr-10 500 1.989 99.506

10 Most Active Bonds Traded between 01-Jan-2010 and 31-Mar-2010

Last Traded Total Volume

Stock Name Last Traded Price
Yield/Discount Traded Last Qtr

PROFIT-BASED GII 1/2010 15.07.2013 99.49 3.45 4786

PROFIT-BASED GII 1/2007 15.03.2010 100.02 2.17 4180

BNMN-IDM 5/2010 63D 08.04.2010 99.91 2.15 2380

MAYBANK 0% 15.05.2018 101.44 4.50 1860

BNMN-IDM 9/2010 63D 13.05.2010 99.69 2.06 1727

PROFIT-BASED GII 3/2009 30.12.2014 102.1 3.42 1500

PROFIT-BASED GII 2/2010 30.09.2015 99.95 3.87 1411

BNMN-IDM 26/2009 63D 04.03.2010 99.93 2.00 1252

BNMN-IDM 4/2010 91D 29.04.2010 99.69 2.05 1150

BNMN-IDM 3/2010 91D 22.04.2010 99.75 2.05 973

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for trading purposes.
None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd (formerly Bondweb Malaysia Sdn
Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any
security or investment. Investors are advised to consult their professional investment advisors before making any investment decision. Materials provided on this
page are provided on an "as is" basis, and while care has been taken to ensure the accuracy and reliability of the information provided in this page, BPAM provides
no warranties or representations of any kind, either express or implied, including, but not limited to, warranties of title or implied warranties of fitness for a
particular purpose, accuracy, correctness, non-infringement, timeliness, completeness, or that the information is always up-to-date.

31
Ringgit Sukuk Market Report
 Ringgit Sukuk Market Report

YTM Curves as at 31 March 2010

LT Islm- LT Islm- LT Islm-

LT Islm-
Tenure Quasi Gov- Corporate- Corporate-
Gov-GII
Khazanah AAA AA2

3m 2.25 2.35 2.52 2.92

6m 2.30 2.40 2.81 3.30
1y 2.50 2.60 3.16 3.84
2y 2.98 3.12 3.59 4.32
3y 3.37 3.44 4.00 4.77
5y 3.82 3.94 4.48 5.29
7y 4.02 4.16 4.89 5.74
10y 4.31 4.50 5.33 6.25
15y 4.53 4.75 5.75 6.71
20y 4.74 5.00 6.17 7.17

5-YEAR YTM Historical Chart (weekly closing, last 6 months)

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for trading purposes.
None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd (formerly Bondweb Malaysia Sdn
Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any
security or investment. Investors are advised to consult their professional investment advisors before making any investment decision. Materials provided on this
page are provided on an "as is" basis, and while care has been taken to ensure the accuracy and reliability of the information provided in this page, BPAM provides
no warranties or representations of any kind, either express or implied, including, but not limited to, warranties of title or implied warranties of fitness for a
particular purpose, accuracy, correctness, non-infringement, timeliness, completeness, or that the information is always up-to-date.

32
YTM Spread (5-YEAR GII) as at 31 March 2010
YTM Matrix – Item Spread
Principle: Islamic
Date: 31 March 2010

Class1 Class2 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 15Y 20Y

Government GII 2.25 2.3 2.5 2.98 3.37 3.82 4.02 4.31 4.53 4.74

Quasi
Khazanah 0.1 0.1 0.1 0.14 0.07 0.12 0.14 0.19 0.22 0.26
Government

Corporate AAA 0.27 0.51 0.66 0.61 0.63 0.66 0.87 1.02 1.22 1.43

AA2 0.67 1 1.34 1.34 1.4 1.47 1.72 1.94 2.18 2.43
Corporate

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for trading purposes.
None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd (formerly Bondweb Malaysia Sdn
Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any
security or investment. Investors are advised to consult their professional investment advisors before making any investment decision. Materials provided on this
page are provided on an "as is" basis, and while care has been taken to ensure the accuracy and reliability of the information provided in this page, BPAM provides
no warranties or representations of any kind, either express or implied, including, but not limited to, warranties of title or implied warranties of fitness for a
particular purpose, accuracy, correctness, non-infringement, timeliness, completeness, or that the information is always up-to-date.

33
Ringgit Sukuk Market Report