South Africa’s maiden sukuk ‘more than four times oversubscribed’

Out-Law News | 24 Sep 2014 | 1:10 pm | 1 min. read

South Africa has entered the sukuk market with the launch of a $500 million Islamic bond.

The National Treasury said yesterday that it had concluded its debut 5.75-year Islamic bond issuance in the international capital markets priced at a coupon rate of 3.90%, “representing a spread of 180 basis points above the corresponding benchmark rate”.

The Treasury said the transaction was more than four times oversubscribed with an order book of $2.2 billion (1-page 128 KB PDF). The bond will be listed on the Luxembourg Stock Exchange. The lead arrangers for the transaction were BNP Paribas, KFH Investment and South Africa’s Standard Bank Group.

The Treasury said South Africa’s decision to issue an Islamic bond was “informed by a drive to broaden the investor base and to set a benchmark for state-owned companies seeking diversified sources of funding for infrastructure development.”

The investor distribution of the sukuk transaction consisted of 59% from the Middle East and Asia, 25% from Europe, 8% from the US and the remainder from the rest of the world, the Treasury said.

According to the Treasury, the investor distribution “represents a resounding success in building a more diversified investor base for South Africa and further demonstrates confidence by investors in the government’s ability to maintain its sustainable macro-economic policy framework coupled with prudent fiscal management”.

The Islamic Development Bank’s annual report for 2012 (201-page / 4.34 MB PDF) said that, together with the Arab Bank for Economic Development in Africa, it was cumulatively co-financing 59 operations for $4.8 billion in African countries, focusing mainly on transport, agriculture and rural development.

Last February, the IDB said it had signed a financing agreement with Burkina Faso to provide a $59m contribution for the construction of the 91-kilometre Dedougou-Tougan road, in north-western Burkina Faso. IDB said that, once operational, the road will boost trade opportunities and play a “significant role in enhancing regional integration” between Burkina Faso and Mali, both IDB member countries.

A report published this year by international ratings agency Standard and Poor’s said Islamic finance can be a “good fit” for infrastructure and project finance in North Africa, because banks lack the long-term funding that these projects require.

According to the ‘Africa Economic Outlook 2014’ (AEO), published in June 2014 by the African Development Bank Group, the Development Centre of the Organisation for Economic Co-operation and Development and the UN Development Programme, foreign direct investment (FDI) and portfolio investment “could soon constitute Africa’s main source of financial flows if the current pace of growth is sustained”.

AEO said. South Africa is likely to remain among the top recipients of FDI to the continent in 2014 with $4.8bn.