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HM Treasury Takes Market by Surprise with Quick Turnaround of UK’s Second Sovereign STG500m Sukuk Issuance at a “Good Price for the Taxpayer”

HM Treasury marched to market the UK’s second sovereign Sukuk – a 5-year benchmark STG500 million Sukuk Ijara on 25 March 2021, following an absence of 7 years from the market after it issued its maiden Sukuk in 2014.

The transaction, conducted by the UK Debt Management Office (DMO) on behalf of HM Treasury and whose settlement date was 1 April, saw “strong demand from investors in the Middle East, Asia and the UK.” The robust demand for the certificates saw the issuance value increase to STG500 million, a move welcomed by the Islamic finance market.

In a fast-moving development the DMO on 22 March 2021 announced its intension “to issue the UK’s second sovereign Sukuk in the coming weeks, subject to market conditions,” and appointed HSBC as the Structuring Advisor and mandated them together with Standard Chartered Bank, Dubai Islamic Bank, Emirates NBD Capital and CIMB Investment Bank as Joint Lead Managers to the transaction. In addition, the DMO appointed Bank ABC from Bahrain, Dukhan Bank (formerly Barwa Bank) from Qatar, KFH Capital from Kuwait and Malaysia’s largest bank in terms of assets, Maybank, as Co-Lead Managers.

The fact that the DMO appointed a demographically wide syndicate of banks to arrange the offering suggests that the Treasury was keen to ensure strong participation from the two most proactive Islamic finance regions – the Gulf Cooperation Council (GCC) area and SE Asia, especially Malaysia.

But within three days, the DMO took the market by surprise by issuing the Sukuk post haste. The pricing of the Sukuk certificates, which mature on 22 July 2026, was– at a profit rate (yield equivalent) on the Sukuk set at 0.333% – flat to the yield on the 1.5% conventional gilts due July 2026. This second issuance, according to the Treasury “attracted high-quality global demand, with orders totalling in excess of UK£625 million and was sold to a broad range of high-quality institutional investors around the world.”

The fact that the issuance materialised in the middle of difficult global on-going COVID-19 impacted market conditions, including third and fourth waves globally of the virus with its various variants, is a testimony to HM Government’s resolve in sending a strong signal to international investors and partners that it means business with its post-Brexit ‘Global Britain’ policy.
Not surprisingly, UK Chancellor of the Exchequer Rishi Sunak, whose task it is to navigate the country’s public finances through the post-COVID economic recovery in the aftermath of Brexit, was buoyed.

“We’ve set out ambitious plans to make the UK the most open and dynamic financial centre in the world. By launching our second sovereign Sukuk, we’re cementing the UK’s position as the leading global hub for Islamic finance outside of the Islamic world. Strong investor demand for this Sukuk meant we achieved a good price for the taxpayer and will help us develop our relationships with Islamic economies around the world,” he declared.

The issuance was well received by bankers and the investor community on two fronts. “The increase in the issuance size of the UK sovereign Sukuk to STG500 million,” emphasised Stella Cox CBE, Managing Director of DDCAP Group, “which more than doubles that of the inaugural transaction, is a very pleasing development. The geographically diverse order book and strong investor demand for the paper shows the appeal of sterling denominated, Sharia’a compliant High Quality Liquid Assets (HQLA) to investors as well as providing an important, regulatory focused liquidity and risk management tool for the UK Islamic banks.”

The UK has traditionally been an attractive investment destination for investors from the GCC, South East Asia and other regions overseas who have regularly and increasingly utilised Sharia’a compliant financial structures to invest in a diverse range of UK assets.

This, maintains Stella Cox, makes her “hopeful that the second sovereign Sukuk will underpin further expansion and development of the UK Islamic finance market, both domestically and in terms of our international outreach. There is no doubt that it supports the UK’s long-term positioning as the leading Western centre for Islamic finance, achieved through a combination of bold policy making and industry expertise, but it also complements government plans to make the UK the most open and dynamic financial centre in the world.

“Being able to offer and demonstrate an established and evolving capability and capacity for Sharia’a compliant investment and financial transactions will be an important component of the UK’s further engagement with major Muslim economies.”

According to HM Treasury, the second sovereign Sukuk will also use the Al-Ijara structure. “It will be underpinned by rental income from a number of central government office properties which are owned by the UK Government. The certificates will be listed on the London Stock Exchange.”

Sukuk, according to HM Treasury are financial certificates, equivalent to bonds, which comply with the principles of Islamic finance. An Al-Ijara structure uses assets (in this case government properties) to generate a regular income stream that is used to pay investors an agreed rate of return, in lieu of interest payments which are not consistent with Sharia’a principles.

The UK issued its maiden sovereign Sukuk in 2014, making it the first country outside the Islamic world to issue sovereign Sukuk and cementing its position as a centre for Islamic finance. “This second Sukuk offering is more than double the size of the first issuance (UK£200 million), increasing the supply of high-quality Sharia compliant, liquid assets to the market and supporting the development of Islamic finance products in the UK,” added the Treasury.

Bashar Al-Natoor, Global Head of Islamic Finance at Fitch Ratings, maintains that HM Treasury’s Islamic finance and Sukuk issuance strategy is driven by factors specific to the UK. “It is about maintaining and reinforcing the UK’s status as the premier Western hub for Islamic finance where many Islamic market participants access international markets. It is about creating a level playing field for the industry in the UK, thus adding to the Islamic finance ecosystem there. This includes the London Stock Exchange’s role as a key global venue for Sukuk listing. And it is about the importance of UK-based legal services due to the use of English law as the governing law for the majority of international Sukuk and syndicated Murabaha agreements,” he maintains.

The post-Brexit dispensation and the UK government’s policy of Global Britain seeking to sign trade and investment cooperation and opportunities, especially in exports and investment flows to and from member countries of the Islamic Development Bank (IsDB), has identified a potential contribution the Islamic finance industry can play in achieving these new goals.

In fact, in this respect and in the context of Brexit and Global Britain, UK International Trade Secretary Liz Truss in a letter to UKEF Chief Executive Louis Taylor in March, reiterated the government’s strategic priorities. These include ‘Export-led Recovery, Clean Growth for a Green Industrial Revolution, Climate Risk Disclosures, The Union and Levelling Up’, to include support not only for large exporters but also SMEs exporting, and advancing the Global Britain concept.

“Our new free trade ambassadors will encourage greater exporting to new markets and will create a growing need for finance and support from UKEF. The UKEF will work with UK exporters who will want to capitalise on the opportunities these new markets will bring. This year UKEF will increase its international network and recruit International Export Finance Executives into Malaysia, the Philippines, Qatar, Egypt, Morocco, and the US,” she said.

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