Sukuk issuance has been a learning curve for Treasury

Finance Minister Enoch Godongwana.

Finance Minister Enoch Godongwana.

Published Nov 28, 2023


Perhaps it was worth the wait.

After all, a promise President Cyril Ramaphosa’s finance ministers made since 2018, starting from Nhlanhla Nene, Tito Mboweni and, now, Enoch Godongwana, has finally come to market.

I am, of course, referring to South Africa’s inaugural rand denominated Sukuk which will be issued by the National Treasury tomorrow. It has taken five years for the transaction to materialise from mark to market, to the frustration of domestic and international investors who could not understand the vacillation. But hats off to Treasury Team Godongwana for persevering and successfully closing the deal.

The Treasury’s journey down their alternative socially responsible value-for-money public debt-raising route is nascent although it resonates in markets all over Africa, the Middle East and Asia, where Sukuk issuance is now firmly part of the debt-raising landscape whether to finance shortfalls in national Budgets and infrastructure, or for corporates to raise working capital, boost Tier I and II capital under the Basel III capital adequacy regime, and refinance more expensive conventional debt.

South Africa is the pioneer of sovereign global Sukuk issuance in Africa, having issued its debut $500 million (R9.3 billion) benchmark Sukuk Ijarah in 2014, with a tenor of five-and-a-half years which was oversubscribed more than four times. But it has taken 13 years for its second foray into the sovereign Sukuk market, albeit a rand issuance. And what a statement of intent Team Godongwana has made to the financial markets! It raised a whopping R20.386bn through a four tranche transaction, varying in tenors, volume and profit rates to be paid to Sukuk holders.

They include:

i) A R7.5m first tranche, with a tenor of 5.3 years and priced at a profit rate of 9.87% a year.

ii) A R8.8m second tranche, with a tenor of 7.3 years and priced at a profit rate of 10.64% a year.

iii) A R2.5m third tranche, with a tenor of 10.3 years and priced at a profit rate of 11.58% a year.

iv) A R1.5m fourth tranche, with a tenor of 12.3 years and priced at a profit rate of 11.90% a year .

The demand from investors for the certificates was robust, with bids coming in at R36.1m. This is against the final allocation in the order book of R20.4bn. This means that the transaction was oversubscribed 1.77 times, giving a bid-to-cover ratio of 177%, which enabled the issuance to be completed in a day.

The National Treasury mandated Rand Merchant Bank (RMB), BNP Paribas and Standard Bank to act as joint lead managers and book-runners to the transaction.

“The launch of this landmark Sukuk,” says the Treasury, “is a key step in broadening RSA’s investor base and enhancing our funding strategy which has been traditionally reliant on fixed rate bonds, inflation linked bonds and floating rate notes. This initiative is a testament to the depth and liquidity of South Africa's domestic capital markets, demonstrating National Treasury’s constitutional mandate and ongoing commitment to financial innovation and market expansion.”

The context of this latest Sukuk, issued through the RSA Domestic Sukuk Trustee Proprietary Limited, on behalf of the Obligor, the government, is important. Several milestones were achieved.

■ This is the first rand-denominated Sukuk Al Ijarah in Africa.

■ The certificates will be listed on the JSE for secondary trading thus unleashing further liquidity in the domestic capital market.

■ The investors comprised a “diverse base” of “13 unique bidders” including first time subscribers – “large Islamic funds and Islamic banks” in South African country credit risk.

■ The Sukuk issuance has a unique social inclusion element – the only one in the world – which requires mandated banks to have a B-BBEE partner.

The aim is for the mandated banks to impart Sukuk structuring technical knowledge to the partners – in this case, THEZA Capital and Africa Rising Capital.

For the Treasury, Sukuk issuance has been a sharp learning curve. In his 2023 Budget speech Godongwana renewed his intention of sourcing public debt financing through alternative instruments such as Sukuk, thus attracting a new investor base and, in the process, developing the local Islamic capital market by building a Sukuk yield curve.

The naivety of Treasury speak is evident in the documents, including the Roadshow Presentation in September 2023 which alludes to the instrument as a “Bond” which it definitely is not.

This is not semantics because if Treasury apparatchiks cannot get their terminology and nomenclature of products right, casually intermingling the conventional ones with the Shariah-compliant terms, it would merely create confusion, especially among domestic investors and those from the Organisation of Islamic Cooperation countries – the investor base the issuance is aimed at. How the Shariah advisories of RMB and Standard Bank missed this is not clear.

Similarly, there is no explanation as to the use of proceeds from the Sukuk issuance including any arm’s length independent auditing oversight as to the drawdown and payments from the funds.

The global context is vital. According to Fitch Ratings, global outstanding Sukuk volumes expanded by 10% y-o-y and for the first time crossed $800 billion in Q3 2023, with sovereigns being the key issuers.

Both outstanding and issued Sukuk continued to hold 30% of the total funding mix in core markets. The momentum is spreading to non-traditional markets including in West Africa especially Nigeria and Senegal.

The fact that one South African transaction in volume was matched by almost six Nigerian Sukuk issuances indicates the significance of the South African transaction.

The single largest issuer of Sukuk in the world is Saudi Arabia. In the first 10 months of 2023, the kingdom has raised $8.6m through domestic sovereign Sukuk issuances. If we include top up and international offerings, then Riyadh has raised an impressive aggregate of $24.2bn through Sukuk issuances in the same period.

For the uninitiated, Sukuk is not a panacea to a country’s debt metrics and woes. But it is an alternative, usually cheaper, financing mode depending on the issuer, commonly referred to as the Islamic equivalent of a conventional bond. The issuer offers Sukuk investment trust certificates, which it sells to investors, thus granting them a share of a tangible asset or its usufruct (use) relating to particular projects or special investment activity, along with the commensurate cash flows and risk.

Because of the Islamic law proscription on interest and trading in debt, Sukuk must link the returns and cash flows of the financing to the assets purchased, or the returns generated from an asset purchased.

In the case of conventional bonds, which merely confer ownership of a debt, the issuer has a contractual obligation to pay to bond holders, on certain specified dates, interest and principal.

In contrast, under a Sukuk structure, the certificate holders each have an undivided beneficial ownership in the underlying assets. Consequently, Sukuk holders are entitled to a share in the revenues generated by the Sukuk assets. The issuer also makes a contractual promise to buy back the Sukuk certificates at a future date at par value.

Parker is an economist and writer in London