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Government of Sharjah Returns to International Sukuk Market with Benchmark US$750m Murabaha/Ijara Sukuk

The Government of Sharjah, through its Finance Department, returned to the international Sukuk market with a benchmark Reg S 10-year US$750 million Sukuk Murabaha/Ijara issuance on 13 July 2021 maturing on 13 July 2031.

The Sukuk certificates were issued by Sharjah Sukuk Programme Limited, an exempted limited liability company incorporated in the Cayman Islands, on behalf of the obligor, the Government of Sharjah, under its unlimited Trust Certificate Issuance Programme established on 5 July 2021.

The Programme was arranged by HSBC and Standard Chartered Bank, who together with Abu Dhabi Islamic Bank, Dubai Islamic Bank and Sharjah Islamic Bank also acted as Dealers.

Sharjah mandated HSBC to act as global coordinator to the transaction, and together with Abu Dhabi Islamic Bank, Dubai Islamic Bank, Sharjah Islamic Bank, Standard Chartered and The Islamic Corporation for the Development of the Private Sector (ICD), to act as joint lead managers and bookrunners and to arrange a series of investor calls with accounts in London, Europe, Asia, the Middle East as well as US Offshore accounts.

Sharjah had given initial price guidance of around 3.5% for an issuance of 10-year US dollar-denominated Sukuk. Demand for the papers despite the impact of the COVID-19 pandemic on the Sharjah economy was robust with the order book attracting more than U$2.75 billion in orders from diverse investor accounts in the Middle East, UK, Europe and Asia. The transaction was over three times over-subscribed.

By the financial close, the pricing had tightened by 30 basis points to a rate of return of 3.20% per annum payable semi-annually in January and July. The Trust assets, according to the Final Terms, comprises 82.56% Ijara assets and 17.44% Murabaha assets. The Sukuk certificates were admitted for listing on the Official List and to trading on the regulated market of Euronext Dublin, on the DFSA Official List and to the Nasdaq Dubai in July 2021.

The transaction comes against a background of mixed economic factors for Sharjah including a rebound from the shock of last year’s oil price crash, and the lessening of the impact of the COVID-19 pandemic.

But in recent years, according to the transaction prospectus, the Government of Sharjah has experienced a rapid increase in net debt and as a percentage of its GDP, increasing from AED22,214 million in 2018 (17.9 per cent. of its 2018 GDP) to AED30,908 million in 2019 and reaching AED 39,273 million in 2020 (34.9 per cent. of its 2020 GDP).

Sharjah raised US$1.25 billion in a two-tranche conventional bond deal in March 2021 comprising 12- and 30-year notes, to plug a budget deficit as a result of the impact of the pandemic. Last year, it raised a total of US$2.25 billion via a sale of an US$1 billion Sukuk offering priced at a profit rate of 2.942% per annum, a 30-year Formosa bond issuance and a reopening of existing bonds.

But this latest US$750 million Sukuk was necessitated because there was only a marginal improvement in lowering the deficit, projected at AED7.5 billion (US$2.04 billion) in 2021 from AED7.8 billion in 2020, according to the Sukuk prospectus. Sharjah has projected expenditure rising to AED17.2 billion this year from AED16.5 billion in 2020 and AED17.6 billion in 2019.

However, according to the Prospectus, Sharjah’s revenue, which fell 24.3% to AED8.7 billion (US$2.4 billion) year-on-year in 2020, is projected to rise to AED9.7 billion this year. However, the Government has a diverse but relatively shallow revenue base.

Sharjah has a relatively diverse economy compared to other GCC economies, with its mining and quarrying sector – which includes crude oil and natural gas – contributing just 4.3% of nominal gross domestic product last year. The Government has in the past provided significant financial support to important local companies.

The Emirate of Sharjah was nonetheless assigned a long and short-term foreign and local currency sovereign credit rating of BBB-, the lowest investment grade rating, and A-3 by S&P Global Ratings with a stable outlook, as well as a long-term issuer rating of Baa3 by Moody’s Investor Services with a negative outlook.

According to the Sukuk Prospectus, Sharjah’s economy is highly integrated with the other Emirates in the UAE through trade, currency, a common banking system and fully open markets. Therefore, any effect of oil price volatility may have a consequent effect on Sharjah.

The UAE’s economy, in particular Abu Dhabi and to a lesser extent Dubai, is significantly impacted by international oil prices. The hydrocarbon sector accounted for 25.0 per cent. of the UAE’s nominal GDP in 2019 compared to 26.0% in 2018 and 20.5% in 2017. The UAE’s economy has in the past been adversely affected by periods of low international oil prices, most recently in the period from mid-2014 to early 2016.

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