An excellent primer for Sukuk market entry and considerations for a successful issuance. Presentation by Muhammad Noman Ansari titled “Sukuk- the most rapidly growing and widely accepted Islamic finance structure”. Whilst very Saudi Arabia focused the presentation also provides coverage of international market considerations.

Issuance of Sukuk – The Main Steps

Key elements of presentation are highlighted.

Advantages of Sukuk

• Diversification of investor base away from banks (fund managers, private banks, insurers, corporates and central banks)
• Attractive maturity terms are available
• Provides rating agencies and creditors with proof of ability to diversify funding, having access to capital markets on a regular basis
• Ability to fund in large size given deep investor base
• Easy to replicate for subsequent transactions

Limitations of Sukuk

• Expensive to prepay in early years (no free call option)
• Issuance is subject to market conditions
• Execution risk could be higher in volatile market conditions vs. loan (targeting core relationship banks)
• Higher upfront costs (ratings, legal fees, etc..), although can be mitigated by establishing a Sukuk/ Trust Certificate Programme
• Work required to acquire credit ratings
• Modification process is more difficult (but far less frequently required) than a bank debt

A shift from Loans to Debt Capital Markets (Sukuk & Bonds)

• Liquidity in the bank loan market has reduced post the credit crisis, which has prompted global borrowers to shift financing from loans to Sukuk & bonds
• Sukuk & Bonds markets have allowed corporates to extend tenors beyond the traditional 5-year sweet spot of the syndicated loan market
• Aggressive pricing levels have been achieved in the Sukuk & Bonds markets on the back of large investor demand, providing corporates with the opportunity to invest and fund their capital expenditure/acquisitions by raising cheap senior funding or capital without having to raise dilutive equity

Benefits of a Sukuk/ Trust Certificate Programme vs. a Standalone Issuance

Funding flexibility

• Allows issuer to issue multiple tranches at the same time (based on the same programme documentation)
• Also provides issuer with the flexibility to issue different kinds of notes (fixed rate, floating rate, callable, putable, full flexibility over currencies of denomination – USD, SAR, G8 and non-core currencies etc – and tenors etc.)

Speed of execution

• All documents (trust deed, programme agreement, form of subscription agreement) are negotiated at the time of the establishment of the programme, so negotiation at the time of each issuance is minimised
• An up-to-date programme can allow issuance in as little as 1 week
• Avoids the requirement for new issuance approvals at the time of each issue
• Reduces execution risk, and provides access to “reverse enquiry” and private placement market

Significant cost efficiencies

• Once established, the programme helps reduce the costs of subsequent drawdowns
• Cost saving benefits are typically better realised if multiple tranches per annum are issued, compared to a standalone issue
• If execution is delayed, documentation of a Programme does not go stale for purposes of Reg S or domestic issuance

International profile

• Demonstrates funding flexibility and ability to raise attractive funding in the international capital markets
• Enhances issuer’s profile in the international investor community and enhances transaction visibility

Commercial Considerations

Size of Issuance

• The size of a Programme or a Standalone issuance is generally a function of a message to the market , setting the amount of financing the issuer is targeting to raise in upcoming 2-3 years or at once
• The size of the programme or issuance will also be driven by the size of suitable identified assets to be tied to the Sukuk structure
• Issuer will have the flexibility to increase the Programme size at any point, in accordance with the terms of the Programme Agreement, should it wish to raise further debt out of the debt capital markets upon raising the maximum indicated size, particularly for M&A driven activities

Tenor Considerations

• Majority of large sized Rule 144A/Reg S offerings were issued via dual- or triple-tranches since 2012, combining a 10-year tranche with a 5- and/or a 30-year offering
• 10-year is an existing investor sweet spot for a Rule 144A / Reg S USD benchmark transaction, as evidenced by both MENA- and CEEMEA-based issues during 2012-2013
• A 5-year tranche will allow Issuer to take advantage of strong Middle Eastern and Asian demand, particularly Islamic investors, and accordingly achieve the most aggressive pricing

Coupon Format

• The majority of international USD issuances, both from the GCC and the broader Emerging Markets, have comprised of fixed rate notes
• On the back of the uncertainty witnessed around the US Tapering event, a significant amount of international investors have shown interest in floating rate note instruments, particularly on short-to-medium term durations
• In 2013, two financial institutions out of the GCC have issued in floating rate notes (QNB and ADCB – both 3-years)

Pricing Considerations

• For a new USD issue, investors’ pricing methodology will be expected to use recent comparables, SWAP rates for comparable tenor and other USD alternate investment opportunities
• Pricing of existing financing arrangements, banking relationship, shareholders, credit rating of the issuer and of the sovereign and market appetite/ liquidity are the factors that dictate issue pricing

Syndicate Structure

• Typically, issuers in the international markets would appoint 2-3 reputable international banks to act as joint lead managers and bookrunners
• This allows issuers to maximize investor reach, have joint views on key decisions and have maximum support in terms of secondary market liquidity
• The two to three banks will lead the different work streams jointly with each taking the lead on one work stream to ensure efficient execution (documentation, Sukuk structuring, investor presentation / marketing and logistics)

Documentation Considerations – Reg S vs. 144A

• The 144A/Reg S market provides issuers with a number of benefits:
  • High investor liquidity
  • Represents largest and most influential international investor base and provides access to the largest pool of EM investors
  • Increased future financing flexibility
• SEC have utilized the 144A/Reg S market to raise USD 3.75bn since 2012, extending its redemption profile with 5-, 10- and 30-year tranches
• Sabic raised c.USD 3bn via the RegS only market, via USD and EUR tranches

Download Full Presentation

  Sukuk Issuance Process.