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Khazanah-owned waste management company Cenviro issues sustainability-linked Sukuk

Khazanah National-owned waste management company Cenviro has issued a two-tranche sustainability –linked Sukuk worth RM54.6 million (US$12.41 million) under its RM500 million (US$113.68 million) Sukuk Wakalah program. Khazanah National issued the world’s first ringgit-denominated SRI Sukuk in 2017. The private placement issuance features a variable rate, incentivizing the issuer to meet its sustainability performance targets (SPTs).

The first tranche of the Sukuk worth RM26.29 million (US$5.98 million) has a tenor of eight years and the second tranche worth RM28.31 million (US$6.44 million) has a tenor of 12 years. Proceeds will fund capital expenditure requirements of the Kualiti Alam waste management center undertaken by Kualiti Alam, and for developing a new satellite waste management center project in Pengerang, Johor, undertaken by Cenviro Johor.

The issuance features a key performance indicator (KPI) of reduction in greenhouse gas (GHG) emission intensity from the baseline year of 2020 and a SPT to reduce GHG intensity by 2025 from the baseline year. The KPI is tied to a step-down profit rate. If the SPT is achieved, the issuer will pay a lower profit rate to Sukukholders incentivizing it to meet its sustainability targets. Cenviro has committed to reporting its KPI performance against the SPT results on an annual basis as part of its sustainability report which will also be externally verified annually.

“Cenviro is fulfilling an important role in Malaysia’s sustainable consumption and production strategy through its innovative waste management practices and expansion into the generation of renewable energy,” commented Gladys Chua, the head of sustainability services at RAM Ratings.

While the variable rate feature is designed to incentivize the issuer to meet the SPTs, it can prove challenging for investors to accept as it presents a conflict of interest. It is in investors’ best financial interest for the issuer not to meet its sustainability targets. This is a unique challenge for sustainability-linked Sukuk issuances. Additional communication on the structure and characteristics of sustainability-linked Sukuk was required to get subscribers to agree to a reduction of the profit rate upon meeting the SPT for this Sukuk.

The sustainability-linked Sukuk also faced some technical challenges, RHB Investment Bank, the lead manager of the issuance, shared.

“As the sustainability-linked Sukuk framework can be slightly more technical compared to SRI Sukuk with data collections to ascertain the KPI baseline as well as justification on the ambitiousness and materiality of the KPI/SPT selected, additional timing will be required during the execution process. This was managed with additional buffer time factored in for drafting and finalizing the framework as well as great commitment from the issuer and RAM Sustainability, the external reviewer providing the second opinion of Cenviro’s sustainability-linked framework,” Norfarasha Abdullah, the head of debt capital markets at RHB Investment Bank, told ISFI.

‘Cenviro sustainability-linked Islamic medium-term note Sukuk
RM54.6 million (US$12.41 million)

16th March 2022
Summary of terms and conditions
ObligorCenviro Group
Size of issueTranche 1: RM26.29 million (US$5.98 million)
Tranche 2: RM28.31 million (US$6.44 million)
PurposeTo fund:
1. Capital expenditure requirements of the Kualiti Alam waste management center undertaken by Kualiti Alam.
2. Development of a new satellite waste management center project in Pengerang, Johor, undertaken by Cenviro Johor.
TenorProgram tenor: 20 years
Tranche 1: Eight years
Trance 2: 12 years
Issuance priceTranche 1: RM26.29 million
Tranche 2: RM28.31 million
Profit rateVariable rate
CurrencyMalaysian ringgit
Maturity dateTranche 1: 15th March 2030
Tranche2: 16th March 2034
Lead manager(s)RHB Investment Bank
Principal advisor(s)RHB Investment Bank
Governing lawMalaysian Law
Legal advisor(s)/councilZul Rafique & Partners
Islamic structure1, Wakalah Bi Al-Istithmar
2, Murabahah (via Tawarruq arrangement)
Underlying assetShariah compliant business operation of Cenviro Group
Shariah advisor(s)RHB Islamic Bank
Face value/minimum investmentRM1,000 (US$227.36)

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