Sukuk continues to drive fund-raising activity in the Islamic finance market, but like other funding avenues, it faces headwinds that impact deal flows. According to S&P Global Ratings, global sukuk issuance in 2023 fell to US$168.4 billion from US$179.4 billion in 2022 on the back of tighter liquidity conditions in Saudi Arabia’s banking system and Indonesia’s lower fiscal deficit.
Despite the market volatilities and lower issuance volume, however, the sukuk market continued to attract new issuers and borrowers. One key development last year was the emergence of new deal structures that contributed to the further development of the Islamic finance market. This was illustrated by two new sovereign sukuk issuers that accessed the market for the first time in 2023 – the Arab Republic of Egypt and the Republic of the Philippines (RoP). Meanwhile, sustainable types of financing continued to proliferate to help fight climate change and meet net-zero targets.
These and other exciting developments in the Islamic finance market highlight the best deals that the board of editors of The Asset has selected as part of the Triple A Islamic Finance Awards 2024.
In the first deal of its kind globally, Malaysia-based digital stock exchange Fusang Exchange completed in October 2023 the world’s first digitalization of an institutionally issued sukuk. The transaction marked the successful tokenization and listing of a digital sukuk representing the corresponding underlying sukuk issued by the International Islamic Liquidity Management Corporation. Fusang Exchange utilized its proprietary Fusang depository receipt (FDR) structure to wrap the underlying sukuk into a digital form. The FDR retains full transparency and certainty of investors’ legal rights and adheres to Shariah standards set by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).
Also in October 2023, Saudi Arabia’s sovereign wealth fund Public Investment Fund (PIF) raised US$3.5 billion in a landmark sukuk comprising two tranches – US$2.25 billion for five years and US$1.25 billion for 10 years. The largest-ever sukuk issuance by a sovereign wealth fund, the offering featured an innovative structure that utilized PIF’s Shariah-compliant listed and unlisted shareholdings as an acceptable asset class for an AAOIFI standard-compliant sukuk. In the case of unlisted shares, PIF provided an undertaking that it would not become a co-owner in the underlying shares during the tenor of the sukuk.
The Dubai-based Sobha Realty priced its inaugural sukuk in July 2023 amounting to US$300 million, which was structured with a call feature, making it the first of its kind for a Gulf Cooperation Council sub-investment-grade, benchmark-sized sukuk. The five-year non-call, three-year sukuk was executed swiftly amid a volatile market environment with the offering 2x oversubscribed and the final pricing tightened by 12.5bp from the initial price thought.
Ittihad International Investment, an Abu Dhabi-based conglomerate, arranged in November 2023 its inaugural offering in the international debt capital markets amounting to US$350 million. The five-year, high-yield sukuk was structured with the payment obligations initially guaranteed by 25 guarantors, being the entities within the Ittihad group based in Abu Dhabi – Dubai Healthcare City Free Zone and Ras Al Khaimah International Corporate Centre. The structure also provided for additional guarantor accession mechanics in certain circumstances, for example, in order to satisfy certain financial ratio tests.
Issuances feature innovative structures
The two debut sovereign sukuk issuances in 2023 also featured innovative structures. The three-year sukuk, issued in February by the Ministry of Finance (MoF) of the Arab Republic of Egypt through the Egyptian Financial Company for Sovereign Taskeek, utilized a unique structure relying on a purchase of usufruct of real estate assets by the Egyptian Financial Company and leased back to the MoF. The deal was 4x oversubscribed with the order book peaking at US$6 billion as it generated a strong demand from regional Shariah-compliant investor base.
The first-ever sukuk offering by the RoP, printed in late November 2023 and amounting to US$1 billion, likewise set a milestone in the Islamic finance industry as it utilized a first-of-its-kind sukuk structure. The 5.5-year issuance was structured combining an ijara of real estate assets along with a wakala of income-generating real estate assets. This is also the first time that the sovereign has issued public debt securities via a trust structure, which is rarely used in the context of a sukuk offering.
In another innovative deal, the UK-headquartered fund manager Equitix concluded in May 2023 a US$75 million Shariah-compliant capital call facility. The landmark transaction represented the first-ever capital call facility in Islamic format provided for a US$200 million infrastructure fund managed by Equitix. The proceeds were used to support investment activities by bridging capital calls on the investor. The facility has a tenor of two years, extendable by a period of 164 days, subject to the discretion and approval of the sole lender HSBC Amanah Malaysia.
Meanwhile, Investcorp India Growth Equity Fund III and Investcorp India E-Growth Equity Fund III secured a US$70 million revolving credit facility – the first Shariah-compliant transaction by Investcorp Holdings, the largest asset manager in the Middle East. While initially positioned as a conventional deal, the company required an Islamic structure, with Standard Chartered acting as the sole underwriter and bookrunner, being able to deliver a bespoke Shariah-compliant financing solution based on commodity murabaha while incorporating the loan syndication mechanics into the deal. The fund gives its investors access to the Indian private equity market.
Another interesting transaction out of Saudi Arabia was the US$1.1 billion acquisition financing and US$300 million bridge loan for TAWAL, the tower infrastructure unit of Saudi Telecom. The proceeds were used to fund the acquisition by TAWAL of the telecom towers owned by the United Group in Slovenia, Croatia and Bulgaria. The transaction was completed using various novel commodity murabaha structures and it marked the first time Islamic financing has been used for the purpose of an acquisition in Eastern Europe.
In a rare sukuk issuance out of the United States, Air Lease Corporation raised US$600 million via trust certificates with the offering underpinned solely by tangible aircraft assets in order to make the structure as robust as possible from a Shariah perspective. At the same time, the nature of the underlying assets entails the outright sale of ownership of certain aircraft, including the airframe and the engines in respect of that aircraft, subject to third-party leases with airline operators – as opposed to the sale of a mere beneficial interest in a trust created over the aircraft. The transaction also represented the first-ever issuance of its kind into the Middle East market from a North American corporate and it was the largest sukuk from a US-based borrower in history.
Shariah-compliant intangible assets
Pakistan likewise showcased a ground-breaking sukuk structure from pharmaceutical company OBS Pakistan (Pvt.) Limited, which raised 3.6 billion Pakistani rupees (US$12.90 million) in a sukuk backed by intellectual property rights, which is recognized as Shariah-compliant intangible assets. Unlike a conventional sukuk, which typically is bolstered by tangible assets, the innovative structure is backed by copyrights of 17 pharmaceutical brands – thus broadening the scope and accessibility of the issuance.
Over in Malaysia, treasury management company Megah Capital, a wholly-owned subsidiary of engineering and construction company Gamuda Berhad, launched a first-of-its kind sustainability-linked financing in Malaysia, comprising of sustainability-linked term financing of up to US$120 million in nominal value and sustainability-linked cross-currency profit rate swap of up to US$120 million in nominal value. The pioneering ESG-linked holistic financing product featured an embedded sustainable derivative solution and included two sustainability performance targets relating to the annual percentage reduction in greenhouse gas (GHG) emissions intensity and the cumulative amount of installed solar power generating capacity.
New asset classes also emerged last year with property developer Exsim Development, through its wholly-owned special purpose vehicle (SPV) Exsim Capital Resources, printing a 365 million ringgit (US$80.40 million) musharaka sukuk and an 85 million ringgit murabaha sukuk. The transaction represented the first Asean green SRI (sustainable and responsible investment) sukuk in the region to be backed by future receipts under sales and purchase agreements of green-certified residential projects. The deal was a securitization and monetization of progress billings involving multiple development projects with multiple construction programmes.
In another first in the Southeast Asian market, AET Singapore Holdings secured in late November 2023 the first sustainability-linked Islamic financing for a shipping industry amounting to US$100 million. The proceeds were utilized to reduce AET fleet’s GHG emissions intensity by 40% by 2030 from the 2008 baseline and achieve its long-term commitment of net-zero GHG emissions by 2050. The pricing is subject to a one-way sustainability margin adjustment whereby there will be a 5bp reduction in margin if AET meets the sustainability performance target of achieving the 40% reduction in GHG emissions intensity.
Another theme that resonated further in the sukuk market last year was the proliferation of sustainable types of financing with issuances of green, sustainability and sustainability-linked sukuk, several of which were from first-time issuers. According to Fitch Ratings, the outstanding ESG sukuk surged by 56.8% year-on-year to reach US$36.1 billion globally at the end of 2023, the bulk of which was in hard currency, mostly in US dollar. By geography, the UAE accounted for the largest market share in terms of issuance with 41%, followed by Malaysia with 28%, Saudi Arabia 21% and Indonesia 10%.
One of the market-defining sukuk deals in 2023 was the US$500 million green sukuk from Abu Dhabi Islamic Bank (ADIB), which was priced in November and represented the first-ever US dollar green sukuk by a financial institution globally. It was the bank’s first senior issuance after an absence of 12 years and the deal was built on ADIB’s efforts to address climate change and to advance sustainable solutions that protect the environment and help facilitate the transition to a low-carbon economy.
The offering attracted a high-quality and diversified order book from some of the largest and most notable emerging-market investors as well as private bank accounts, real money accounts and green investors. It achieved an attractive pricing as it tightened by 30bp from the initial price thought.
Joining ADIB as a first-time green sukuk issuer out of UAE in 2023 was logistics company DP World, which printed in September a US$1.5 billion offering for 10 years. It was the largest corporate sukuk deal in the UAE in the past five years and it was launched based on a wakala structure with a commodity murabaha component, thereby reducing the reliance on tangible assets to a minimum of 55% and the remaining 45% to be structured as a commodity murabaha, which does not require physical assets.
Aldar Investment Properties also joined the green sukuk bandwagon with a US$500 million issuance in May 2023, which likewise marked its return in the international debt capital markets since 2019. The 10-year deal garnered high-quality demand with strong investor diversification across geographies and types of investors. It achieved an attractive pricing with a negative new issue concession.
AED-denominated green sukuk
Another UAE deal that stood out in 2023 was the AED1.3 billion (US$350 million) green sukuk by First Abu Dhabi Bank (FAB), representing the first-ever AED-denominated green sukuk and the largest AED-denominated issuance in 2023. It achieved the lowest pricing at 4.93% by a UAE financial institution in the AED market, and the strong domestic demand enabled FAB to upsize the deal amount from the initial target of AED1 billion.
From Saudi Arabia, Al Rajhi Banking and Investment Corporation issued in March 2023 its debut ESG-labeled sukuk – a US$1 billion sustainability sukuk – which was the largest such instrument printed by a Saudi Arabian bank in the US dollar market. The issuance was upsized from the initial target amount of between US$500 million and US$750 million on the back of strong investor demand, which also resulted in achieving a negative new issues premium.
In what is considered to be one of the most significant energy transition projects in the world, NEOM Green Hydrogen Company signed a US$6.1 billion green project financing in May 2023 for the construction of the largest commercial-scale green hydrogen production facility. Up to 4 gigawatts of renewable energy assets consisting of onshore solar, wind and battery storage will produce up to 600 tonnes per day of green ammonia, which will be supplied to global markets. Upon completion, the project will mitigate the impact of 5 million metric tonnes of carbon emissions per year.
A plethora of sustainability sukuk and green sukuk was printed in the Malaysian ringgit market in 2023, illustrating the continuing huge appetite for local currency fund raising. Malaysia’s digital services company MY E G Services priced in August 2023 a 250 million ringgit offering in a deal that captured two notable themes in the Malaysian market as the proceeds were intended to help fund the development of the country’s national blockchain infrastructure and to build housing for foreign workers. The issuance, which was the company’s first offering with institutional investors, was increased from the initial estimate issue size of between 100 million ringgit and 200 million ringgit.
KPJ Healthcare, through its SPV Point Zone (M), became the first healthcare provider to issue a sustainability sukuk in the ringgit market after printing a 555 million ringgit deal in March. The triple-tranche transaction attracted a huge interest from investors with the order book closing at 5.3 billion ringgit, prompting an upsize in the deal mount from the initial target of 450 million ringgit.
Another headline deal out of Malaysia is the 390 million ringgit Asean green SRI sukuk for reNIKOLA Solar II, which achieved financial close in September 2023. This is the first climate-related sukuk certified by Climate Bond Initiative in Malaysia and globally following an independent verification by RAM Sustainability. The proceeds were used to refinance two solar photovoltaic plants, which have signed power purchase agreements with Tenaga Nasional for a period of 21 years.
ESG sukuk widens investor base
According to Fitch Ratings, the scarcity of sustainable projects or green assets obstruct some sovereigns and corporates from issuing ESG sukuk and instead they arrange just conventional sukuk or bonds. While ESG issues may not always have a pricing advantage, they often widen the issuers’ investor bases by attracting ESG-sensitive investors.
Fitch expects ESG sukuk will cross US$50 billion outstanding globally within the next two years as issuers aim to meet their funding diversification goals and ESG mandates, alongside new regulatory frameworks and government-led sustainability initiatives. Risks include geopolitical volatilities, surging oil prices that could reduce funding needs in some core sukuk markets, new Shariah requirements that could alter sukuk credit risk, and the weakening of the sustainability drive in major markets.
In the UAE, the Higher Sharia Authority directed Islamic banks and windows to create separate sustainable businesses and activities within the existing business lines that include sustainable sukuk issuances and financing. In addition, the Dubai Financial Services Authority waived regulatory fees on ESG listings on Nasdaq Dubai for 2024.
Oman unveiled a sustainable finance framework, with plans to issue green, social and sustainable sukuk and bonds. The proceeds will be used to fund and refinance renewable energy projects aiming to reduce reliance on fossil fuels and to attract ESG investors. In Malaysia, the tax deduction given on the issuance cost of SRI sukuk has been extended to 2027. These initiatives, according to Fitch, could help boost the ESG debt issuance in the near term.
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