The outlook for Islamic securitization seems ever brighter, as Malaysia's Cagamas continues deliberating over which banks will handle its upcoming Islamic MBS - a first for the market - other entities are getting on with the business of doing deals.

Islamic ABS is still in its infancy in Malaysia and consequently, each new offering seems to be a first of its kind in some way, such as Talam Corp's completion of the first Islamic CMBS earlier this month (see ASR 2/7/04).

This is also the case with the upcoming M$80 million transaction from Pasir Gudang Local Authority, with AmMerchant Bank the arranger. The deal will be the first issued by a local authority and first backed by future property tax collections.

Local authority property taxes are compulsory on all housing falling within the authority's jurisdiction. There are 100 local authorities in Malaysia, which generate between 50% and 95% of their respective incomes from taxes.

Up until now, local authorities have largely depended on state and federal governments for additional financial support. Consequently, analysts see much scope for other local authorities to follow Pasir Gudang's lead, as the state government wants local authorities to be more self-sufficient. In fact, the main purpose of Pasir Gudang's deal is to repay existing bank loans and fund working capital needs.

Pasir Gudang's transaction - slated to be issued out of the PG Municipal Assets SPV - is structured using Mudharabah contracts, which basically involves profit sharing rather than interest payments. Investors (called Rabb al-mal) provide the capital while the entrepreneur (Mudharib) offers skills to manage the assets. Should the transaction perform up to expectations, both get a share of the profits at a previously agreed upon fixed ratio.

The transaction is split into six series of notes with maturities ranging from one to six years. Rating Agency Malaysia has assigned triple-A ratings to all six tranches, encouraged by the fact that 96% of collections are collected within six months of tax invoices being sent out. Pasir Gudang also has a 1.7-times coverage ratio over its financial obligations.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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