South Africa has made one of the most meaningful steps to becoming the region’s main Islamic finance hub with its debut sukuk – the first dollar sukuk from an emerging-market sovereign.
The $500 million 5.75-year sukuk was priced at a coupon rate of 3.9% and was more than four times oversubscribed, boasting an order book of $2.2 billion. BNP Paribas, Standard Bank and KFH Investment were the lead managers on the deal.
The main reasons behind the issue for South Africa included broadening the investor base and tapping into high savings and the growing wealth in the Middle East and Asia, says Megan McDonald, head of Africa DCM at Standard Bank, who worked on the deal.
While the conventional bond that South Africa issued earlier this year attracted nearly 60% investors from the US, 59% of those who took part in the inaugural sukuk came from the Middle East and Asia.
The sukuk will also set a benchmark for state-owned companies seeking to diversify sources of funding for infrastructure development and help South Africa on its path to becoming Africa’s Islamic finance hub.
Following in the footsteps of the sovereign, parastatals as well as state-owned companies – such as Eskom, Transnet and Sanral, South Africa’s national roads agency – could potentially be the next to issue sukuk in the country.
Indeed, South Africa’s sukuk has been a long time in the making. The sovereign initially voiced interest in a Shariah-compliant bond in 2011.
Rajiv Shah, head of Africa DCM at BNP Paribas, who worked closely on the deal, says: “Although South Africa has been talking about issuing sukuk in an official capacity for years now, issuing sukuk in a non-Islamic country can be a difficult feat.
“In non-Islamic countries, you need to ensure that you have the right sort of assets backing the deal. Moreover, you need to structure it taking into account existing legislation – something that can be tricky in a non-Islamic country.”
The assets backing the sukuk are fixed infrastructure assets, although the specifics have not been officially disclosed by the treasury, says Shah.
“The tenor may seem odd at first glance, but we took into account the needs of the sovereign and how Islamic investors have traditionally reacted to debut sukuk issuers,” says Shah.
“For debut sukuk issues, the deepest pool of liquidity is at the five-year part of the curve, but taking into account re-financing risk, we extended the tenor to 5.75 years. The deal was a huge success in many respects and this is a major step towards the sovereign becoming the region’s Islamic finance centre.”
As Standard Bank's McDonald says: “$500 million is a benchmark size which compares very favourably with the £200 million issued by the UK and $1 billion by Hong Kong. This is only the third sukuk to be issued by a non-Islamic country and $500 million is a sizeable result for South Africa.”
“Moreover, the deal priced extremely well: investors only paid a 10 basis point premium on the issue compared to the conventional dollar curve. Often, they can expect to pay at least 20 to 40bp.”
New dawn for Islamic finance
2014 has been a landmark year for Islamic finance as South Africa joins Hong Kong and the UK to issue an internationally placed dollar-denominated sukuk. Luxembourg has also made its sukuk ambitions known and is set to be the next non-Islamic country to issue.
In 2013, the state of Osun in Nigeria issued a N10 billion ($62 million) sukuk, the first Islamic bond in local currency from large country in Africa. In July, Senegal issued a $200 million sukuk in local currency in a bid to become west Africa’s Islamic finance hub.
Before the South African issue, African sukuk issuance amounted to only 0.6% of global sukuk issuance outstanding, but as funding requirements continue to grow for the continent and around the globe, sukuk is set to take off. According to Moody’s, sovereigns are expected to issue $30 billion sukuk in 2014, bringing the sovereign market to around $115 billion by the end of the year.
The overall success of the deal also marks a vote of confidence in the country, where mining strikes since February and subdued economic growth have dampened investor sentiment.
“The South Africa case shows how comfortable investors are with the credit and will set the precedent for other African countries to follow suit,” says McDonald. “The sukuk will broaden the appeal of Africa to investors more generally.”