US Dollar Sukuk Market’s New Chinese Entrant

Chinese state-owned bank the Industrial and Commercial Bank of China (ICBC) has become the first Chinese bank to help arrange an international dollar based sukuk. ICBC helped arrange Pakistan’s recent $1 billion 5 year Sukuk.

ICBC helped Pakistan achieve an orderbook of over $8 billion for its dual issuance of sukuk and a conventional Eurobond of $1.5 billion and likely attracted Chinese state coffers flush with US dollars holdings.

China’s Strategic Interest in Pakistan and Islamic Financing

China is building stronger trade ties with Asian countries under its “One Belt, One Road” strategy to rebuild Silk Road trade links with Asia and Europe. As part of this strategy it is eager to build its Islamic financing capabilities both to tap and invest funds in infrastructure projects.

Additionally, the China–Pakistan Economic Corridor (CPEC) is a collection of infrastructure projects that are currently under construction throughout Pakistan. The value of CPEC projects is worth $62 billion and provides China with a vital route to the Arabian Sea for trade routes to the Middle East, Africa and Europe.

Islamic Finance in Pakistan to gain much from offering maritime route for China

The Chinese Administrative region of Hong Kong has issued a number of sukuk (Hong Kong Sukuk 2027, Hong Kong Sukuk 2020, Government of Hong Kong 2019) but none were arranged by Chinese banks.

Dana Gas loses Sukuk Case

The Royal Courts of Justice in London has ruled in favour of creditors in a dispute with Dana Gas, which now must repay $700 million raised as part of a Sukuk. English Law underpins the majority of global sukuk.

Dana Gas had claimed the Sukuk was no longer compliant with Sharia law. Mr Justice Leggart said the view held by Dana Gas is “untenable and flatly inconsistent with its express wording” of the terms.

“The grounds relied on by Dana Gas are all based on allegations that part or all of the transaction is unlawful or invalid or cannot lawfully be performed as a matter of UAE law,” the judge said.

“The suggestion that the existence of contractual rights and obligations depends on the parties’ subjective states of mind is not consistent with the objective approach which is fundamental to the modern English law of contract.”

Download the full judgement: Dana-Gas-judgment.

Next Case in Sharjah

“The outcome in the UK court was not unexpected given Dana Gas was not able to participate,” said Dana’s advisory firm Houlihan Lokey. “We do not expect this to impact the final legal outcome which will come from the Sharjah Courts. This is just the beginning.”

The Sharjah court hearing is scheduled for Christmas Day. Dana said in a statement: “We hope all parties will properly participate to expedite matters in the interests of all concerned”.

Faris Hadad-Zeros is the World Bank Country Manager for Malaysia.

Malaysia Launches the World’s First Green Sukuk

In 2016 the World Bank Group Global Knowledge and Research Hub joined a Technical Working Group with the Central Bank of Malaysia and the Securities Commission in supporting the Malaysia Green Finance Program, leveraging our experience and expertise in green financing. The program aims to encourage investments in green or sustainable projects through the development of green Islamic finance markets; initially in Malaysia, and subsequently, in the ASEAN region.

The program has supported the launch of the first green sukuk in the world on June 27, 2017. The sukuk is a green Islamic bond, where the proceeds are used to fund a specific environmentally-sustainable infrastructure project, such as the construction of renewable energy generation facilities.

The sukuk should be attractive to conventional investors if they offer reasonable risk-adjusted returns and are properly marketed. A sukuk that meets these criteria and provides funding for an environmentally sustainable project could be particularly attractive to environment focused investors for two principal reasons.

First, sukuk provide investors with a high degree of certainty that their money will be used for a specific purpose. To comply with the underlying Shari’ah principles, the funds raised through the issuance of a sukuk must be applied to investments in identifiable assets or ventures. Therefore, if a sukuk is structured to provide funds for a specified infrastructure project, such as a renewable energy project, there is little chance the investors’ money will be diverted and used for another purpose.

Green Sukuk

Second, many more environment-focused investment products exist on the equity side of the capital markets than on the fixed-income side. Since most investors in environment sustainability want to know precisely how their money will be used, bonds that are general obligations of an issuer have limited appeal unless all activities of the issuer meet the investor’s environmental standards. Sukuk, which are most like a conventional fixed-income security, could help fill the fixed income supply gap for environmental investors, to the extent the proceeds of a sukuk are earmarked for an environmentally-beneficial purpose.

What is Green Sukuk?

The Global Knowledge and Research Hub has been partnering with public and private institutions in Malaysia and elsewhere to develop modern and integrated financial services and markets. It is through this partnership that the new green Islamic finance initiative has been spearheaded, and will contribute a new and innovative financial product that can be used throughout the world.

This article was first published on World Bank’s East Asia & Pacific On the Rise blog. To access the blog, visit bit.ly/WB_greensukuk.  

International Islamic Financial Market (IIFM) Releases Sixth Sukuk Report

The Islamic Financial Market standard-setting body, IIFM has released the sixth edition of its Sukuk report. IIFM focuses on standardization of Islamic financial contracts and product templates relating to the Capital & Money Market, Corporate Finance and Trade Finance segments of the Islamic Financial Services Industry (IFSI).

The Sukuk Report – A Comprehensive Study of The Global Sukuk Market

The Sukuk market continues to evolve and expand to new regions with the bulk of issuances coming from sovereign and quasi-sovereign entities which is having a positive impact on the development of Sukuk market. In order to create depth in the Sukuk market, there is a need for corporate entities to become more active in issuing Sukuk taking lead from jurisdictions like Malaysia.

In recent years, the structural preference of issuers has shifted to Murabahah, Wakalah and Mudarabah modes from structures requiring more tangible assets. Striking a right balance in diversification of Sukuk structures is needed in order maintain orderly growth of the market. This research report provides invaluable information on the prospects and trends of the global Sukuk market and highlights some major issuances around the world.

This report can be used as a benchmark by all the industry stakeholders and decision makers, particularly in new jurisdictions as well as regions with high concentration of the worlds Sukuk issuances such as GCC countries and Asia, in their assessment of trends in the issuance of Sukuk across the globe.

Forward by Khalid Hamad – Chairman of IIFM

The report finds that the global Sukuk issuances during 2016 stood at USD 88 billion, which is an increase of 44% over 2015 issuances of around USD 61 billion. The longer tenor Sukuk issuances supported by sovereigns continue to grow and among the positive developments have been the entrance of new jurisdictions such as Jordan and Togo. In addition, there have been some exceptional issuances in 2016 such as the USD 398.8 million first of its kind exchangeable Sukuk by Malaysia’s Khazanah Nasional Berhad with exposure into China’s water utility sector.

In Pakistan, the USD 955 million equivalent Sukuk was issued for project financing by hydropower company Neelum Jhelum with government guarantee. On the retail front, Indonesia issued its largest Sukuk offering of USD 2.37 billion equivalent.

In recent years, Sukuk have been issued for fulfilling the varied financing needs of the issuers such as enhancement of bank’s capital base, monetary or budgetary management, project financing, aircraft financing etc. which is an encouraging sign and I hope that the opportunities offered by this fixed income Islamic finance instrument is optimized in the coming years.

There is an increasing need for addressing the various challenges which comes with the growth of any financial product and has to be tackled by creating greater transparency and harmonization in the documentation and product structures. In this regard, the standardization of agreements will contribute to the alleviation of some of the problems that occur in the field of Sukuk issuance such as the Dana Gas issue which is present in the minds of all the industry stakeholders and will have implications for Islamic finance requiring consolidation efforts at all levels to avoid such problems in the future.

Overview of Global Sukuk Market

Total global issuances amounted to USD 88.3 billion in 2016. Global Sukuk issuance has increased from USD 60.7 billion in 2015 to USD 88.3 billion in 2016, around 44% jump in volume. The increase in volume during 2016 was due to steady issuances from Asia, GCC, Africa and certain other jurisdictions while Malaysia continue to dominate the Sukuk market, though share of countries like Indonesia and Turkey increased as well.

In future, a standardized mechanism for Shari‘ah compliant foreign currency hedging, such as that developed by IIFM, will facilitate borrowers to issue Sukuk in other jurisdictions without exposing the Sukuk holders to foreign exchange risk.

Download Full Report

 IIFM Sukuk Report (6th Edition) 4MB

Garuda Indonesia Sukuk hits Turbulence

After the Dana Gas Sukuk leak, another Sukuk announced turbulence when Indonesian national airline Garuda Indonesia announced its $500 million sukuk issued in 2015 may need to make an emergency landing.

The Indonesian flag carrier is seeking to amend a number of conditions as below:

1. Amend Condition 6(c)(i) to read that “Consolidated Total Equity shall not be less than U.S.$500,000,000;”
2. Amend Condition 6(c)(ii) to read that “the ratio of Consolidated Total Debt to Consolidated Total Equity shall not exceed 3 times;”
3. Amend paragraph (d) of the definition of “Consolidated Total Debt” to delete and expressly exclude references to “indebtedness under a finance or capital lease;”
4. Irrevocably waive any Dissolution Event, Potential Dissolution Event or breach of the Terms and Conditions, the Declaration of Trust relating to the Non-Compliance Event

Garuda recorded a net loss of $283.8 million in the first half of the year, attributable to a $138.3 million loss due to tax amnesty programme expense, and $145.5 million to losses from operations. Net losses from operations amounted to $145.5 million for the six months.

Sukuk holders who vote in favour will receive a participation fee of 0.6% of the outstanding principal amount of their certificates. A shareholder meeting is scheduled for 18 August in Hong Kong.

Garuda Indonesia 2020

The Wakala Sukuk issued in 2015 for $500 million achieved an order book of US$1.9bn and was issued at a profit rate of 5.950%. The sukuk was issued for a duration of 5 years.

Full details of Garuda can be found at: Garuda Consent Solicitation.

Stated Target of SAR 70 Billion for 2017 Leaves Room for Further Issuances

Saudi Arabia’s Ministry of Finance is likely to return to the domestic Sukuk market this year as Moody’s state the issuance is credit positive for Islamic Banks.

The Ministry of Finance raised SAR17 billion ($4.5 billion) in its first domestic sukuk issuance this week under a newly established local currency government sukuk program.

Bloomberg news reported the large over-subscription of the issuance, with demand exceeding SAR 51 Billion against an issuance of SAR 17 Billion resulting in 300% coverage ratio means there is spare capacity in the market. At the start of the year the government had stated it may raise SAR 70 Billion from domestic banks in 2017 and it is likely the Ministry of Finance is likely to return for further issuances to mope up the spare liquidity and meets its stated target.

Last Year Government Raised SAR 100 Domestically

Last year the Saudi government raised SAR 100 Billion from the domestic market, which resulted in pushing up domestic borrowing costs for the private sector as lending capacity was squeezed domestically. Private sector lending in the Saudi economy remains flat.

The Sukuk issuances were divided into three tranches with the first tranche for SAR 12 Billion and maturing in 2022, the second tranche for SAR 2.9 Billion and maturing in 2024 and third tranche for SAR 2.1 Billion and maturing in 2027.

Summary of Issuance

Moody’s – Issuance is Credit Positive for Islamic Banks

In commentary Moody’s stated “The issuance is credit positive for Saudi banks because their profitability will benefit from the transfer of their large, low-yielding reserves of cash and placements with the Saudi Arabian Monetary Authority (SAMA) and banks to higher-yielding government Islamic bonds. Additionally, the issuance will help address a shortage of shariah-compliant liquidity management instruments for Islamic banks and support the development of a domestic sukuk market by establishing a yield curve.”

Saudi Banks Excess Liquidity versus Year-on-Year Change in Credit (Moody’s/SAMA)

Moody’s added “In addition to boosting profitability, a new sukuk programme will provide a deeper pool of shariah compliant securities to facilitate liquidity management for domestic Islamic banks. Facing a shortage of shariah-compliant investments that they can hold for liquidity purposes, Islamic banks tend to maintain higher levels of low-yielding cash and Islamic interbank placements on their balance sheet than their conventional peers, which curbs their profitability. As of March 2017, Saudi Islamic banks’ holdings of cash and placements with SAMA and banks equalled 20% of their total assets, versus 16% for conventional Saudi banks, while their investment portfolios accounted for only 8% of their asset base, versus 20% for conventional Saudi banks. We expect that sukuk issued under the program, like other traditional government-backed instruments, will be eligible for repo with SAMA for banks to access cash liquidity”.

Download Moody’s Report

 Download Moody’s KSA local Sukuk Issuance report

Dana Gas Sukuk Debacle

Asif Murat of Aberdeen Asset Management discusses the Dana Gas Sukuk default crisis impacting the GCC Sukuk market.

Domestic Ramadan Sukuk Market Activity in Saudi Arabia

The Saudi Investment Bank, and National Commercial Bank have both been active recently in the Saudi Riyal denominated market with small domestic issuances.

Saudi Investment Bank Sukuk

The Saudi Investment Bank announces that on Tuesday 6 June 2017 it has successfully closed its transaction of SAR 285 million subordinated Tier I Sukuk, compliant with Islamic Sharia principles through a private placement offer in Saudi Arabia.

The Sukuk include salient features which enhances the Bank’s capital base and capital adequacy ratios. In addition, the Sukuk further diversifies the Bank’s funding sources and extends its maturity profile.

The Sukuk are perpetual securities with no fixed redemption date. However, the Bank has the right to call the Sukuk on predefined dates. All required approvals from the regulatory authorities have been obtained for the issuance. Alistithmar for Financial Securities and Brokerage Company acted as the Sole Lead Manager for this issuance.

NCB Sukuk

The National Commercial Bank (NCB) announces that on Thursday 5th June 2017 it successfully settled an issuance of subordinated Additional Tier 1 Capital Sukuk, in the amount of SAR 1.3 Billion, compliant with Islamic Sharia principles, through a private placement offer in Saudi Arabia.

Sukuk issuances such as this are intended to strengthen the Bank’s capital base in accordance with the Basel III framework and sustain its growth while maintaining healthy capital adequacy levels. Additionally, the Sukuk will extend the maturity profile of NCB’s liabilities while continuing to diversify its sources of funding.

The Sukuk are perpetual securities with no fixed redemption date. However, NCB has the right to call the Sukuk on a predefined date. All required approvals from the regulatory authorities have been obtained for the issuance. NCB Capital Company acted as Sole Lead Manager for the issuance.

Secondary Market Indicative Prices published by Emirates Islamic Bank

Sukuk Indicative Quotes – June 07, 2017

Sukuk Market Spike

The global Sukuk market is well positioned to beat an annual issuance record last breached in 2012.

Source: Kuwait Finance House (KFH)

The Sukuk record for issuances was in 2012 when $137.1 billion was raised, though another often quoted number is circa $51 billion as per the below graph from Bloomberg.

International vs Domestic Sukuk

The discrepancy between the two number is the Bloomberg one includes only hard currency US dollar international issuances, whilst the KFH figure includes both domestic currency and international sukuk, and likely includes short-term sukuk which were issued multiple times within the year.

A short term sukuk would be, for example issuances from the International Islamic Liquidity Management, an international body which issues and then re-issues the same sukuk for purposes of short-term liquidity provision for Islamic banks.