Redemptions, a Stale Sukuk Price and Two Sets of Unitholders
Amanah Sejahtera is a RM1.2 billion Malaysian bond unit trust. Over five business days it has received redemption requests equal to 15% of net asset value, mostly from two institutional holders who gave no advance notice.
About 9% of the fund sits in a five-year unrated sukuk issued by a Sarawak-based infrastructure company. It last traded 14 months ago and is carried at cost plus accrued profit. Two other holdings, together 6% of the fund, are suspended following issuer defaults and are also carried at their last available prices.
To meet redemptions, the manager, Azlan, proposes selling the most liquid holdings - Malaysian government securities - because they can be sold same day at a tight spread. A fund director suggests marking the sukuk at par "because it is still paying its coupons on time". Azlan is also conscious that crystallising a discount on the illiquid paper would show a sharp fall in the published net asset value and prompt the remaining investors to leave.
1. What is the core fairness problem in Azlan's plan, and how should the redemption be handled?
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The problem is a transfer of value between two groups of unitholders who are entitled to be treated equivalently.
If the fund sells only its liquid government paper, the redeeming investors exit at a net asset value that assumes the illiquid sukuk and the suspended bonds are worth their carrying values. The cash they receive is real; the assets left behind are, at best, uncertain. The remaining unitholders are left holding a portfolio that is now more concentrated in the very paper nobody could sell. In substance, the leavers have been paid partly with the stayers' money. That is the fairness problem, and it exists whether or not the carrying values are eventually proved right.
Handling. First, obtain a defensible valuation before transacting, not after: the price at which redemptions are struck must reflect the illiquid assets, so the leavers bear their share of the illiquidity. Second, sell liquid assets only to the extent needed, and consider whether a pro-rata in-specie or deferred redemption mechanism, or a temporary suspension of dealing, is available and appropriate under the fund's deed and the regulator's rules. Third, escalate to the trustee immediately - the trustee's oversight role exists precisely for situations where the manager has an incentive to prefer one outcome. Fourth, document the sequence of decisions and the reasoning, because a redemption run invites later complaint. Fifth, communicate with remaining unitholders promptly and factually; silence during a run is read as concealment. Azlan's worry about a falling NAV prompting further exits is a real commercial concern, but it is not a reason to price assets favourably to departing investors.
2. Evaluate the director's proposal to carry the sukuk at par because coupons are being paid.
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Coupon payment and capital value are different questions, and the proposal confuses them.
A bond can pay its coupon on time and still be worth substantially less than par. The relevant factors here are: the issuer's capacity to repay principal at maturity, the absence of any rating, the 14-month absence of a trade, and the fact that two comparable holdings in the same portfolio have already defaulted. A five-year unrated infrastructure sukuk in an environment where similar issuers are failing is not presumptively a par asset. Carrying it at cost plus accrued is an accounting convention, not a valuation.
What should happen instead. The sukuk should be fair-valued using observable inputs where they exist and a documented model where they do not - discounted cash flows at a credit-adjusted yield, comparable issuer spreads, any recovery evidence from the defaulted names, and the issuer's latest financial information. Model inputs and the resulting price should be documented, reviewed independently of the investment team, and approved by the trustee. Any change in valuation methodology should be disclosed. If the fair value is materially below carrying value, the NAV must reflect that, and the manager must accept the consequence for flows.
The director's conflicts. A director who prefers a higher published NAV has an interest in the outcome, and the suggestion, made in the middle of a redemption run, will be read that way. The decision should be taken out of the investment team's hands and placed with an independent valuation or pricing committee with trustee involvement. If the manager has no credible basis for par, par is a fiction - and a fiction applied at the exact moment investors are exiting becomes a misstatement to the market.
3. What should Azlan communicate, to whom, and in what sequence over the next 48 hours?
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Sequence matters because each stakeholder needs information before they are asked to act on it.
Hour 1–4: internal and trustee. Notify compliance and risk; convene the pricing/valuation committee; inform the trustee in writing of the redemption level, the illiquid holdings, the proposed asset sales and the valuation question. The trustee must not learn about this from a unitholder complaint.
Hour 4–24: valuation. Complete the documented fair value of the sukuk and the suspended holdings. Strike the redemption price only after that is settled. Record who decided, on what basis, with what dissent.
Day 1–2: regulator. Where the rules require notification of material events, a suspension, a pricing adjustment or a breach of investment limits, notify the Securities Commission promptly and factually - what happened, what was decided, what unitholders were told. Voluntary early disclosure is treated very differently from disclosure extracted after the fact.
Day 1–2: unitholders. Issue a short, plain notice to all unitholders stating the level of redemptions, that certain holdings are illiquid, how the fund is being valued, whether dealing continues or is suspended, and what investors should not assume. Avoid reassurance that cannot be substantiated; avoid language that favours the leavers or the stayers.
Throughout. Keep the two institutional redeemers on a strictly equal footing with everyone else - no early settlement, no preferential price. Every conversation logged. Azlan's personal exposure is greatest not in the valuation call but in any suggestion that information or treatment was uneven.