ICD Returns to Market after Absence of Four Years with a Benchmark US$600m Sukuk to Help Member Countries’ Private Sector Recover from COVID-19 Impact

The Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Islamic Development Bank (IsDB) Group, successfully issued its latest Sukuk offering in October 2020 – a benchmark 5-year Senior Unsecured US$600 million issuance. The Sukuk was issued by ICDPS Sukuk Limited, incorporated in Cayman Islands, under its Trust Certificate Issuance Programme, which is guaranteed by its Obligor, ICD.

ICD had mandated Goldman Sachs International, HSBC and Standard Chartered to act as the global coordinators to the transaction and to arrange a series of calls with global and fixed-income investors across Asia, the Middle East and Europe for a five-year US dollar denominated Sukuk.

The three banks were joined by Bank ABC, Boubyan Bank, Dubai Islamic Bank, Emirates NBD Capital, First Abu Dhabi Bank, Gulf International Bank, ICD, KFH Capital, LBBW, Mizuho Securities, Samba Capital, SMBC Nikko and Warba Bank as joint lead managers and joint bookrunners.

The initial price guidance was set at 160 basis points above Mid Swaps (MS). The Sukuk, which attracted strong demand from investors, was three times oversubscribed with the orderbook reaching US$1.5 billion. The pricing tightened and the transaction was eventually priced at a profit rate of MS + 140 basis points.

According to ICD, the Sukuk subscription attracted 37 international and regional investors. This, it stressed, is a testament of the investors regarding ICD’s credit story and new strategy which the new management has been working diligently to formulate and implement over the past two years. The Corporation attracted a very strong investor response despite a slightly weaker market sentiment.

The diversity of the orderbook saw investors from 13 countries in Europe, Asia, and the Middle East. More specifically, 4% of the transaction was allocated to UK/Europe, 21% to Asia and 75% to the Middle East. By investor type, fund managers were allocated 13%, Banks/Private Banks 57%, Agencies/Central Banks 29%, and others 1%.

This latest issuance is ICD’s second only foray into the international Sukuk market. ICD issued its maiden Sukuk in April 2016 – a 5-year US$300 million issuance which was priced at a profit rate of 2.468% per annum maturing on 13 April 2021. “This is great news for all our member countries and recognition of ICD’s two years of hard work,” stressed Ayman Sejiny, CEO of ICD, “It will enable us to better serve our member countries. While the current economic environment is experiencing turbulence, this achievement is a testament to our experience and expertise.”

The Corporation is rated A by S&P Global Ratings, A+ by Fitch Ratings and A2 by Moody’s Investors Service. In September 2020, Fitch Ratings downgraded the ICD’s Long-Term Issuer Default Rating (IDR) to ‘A+’ from ‘AA-‘. The Outlook on the Long-Term IDR is Negative. Fitch has also downgraded ICDPS Sukuk Limited’s (formerly Hilal Services Ltd) medium-term note (MTN) programme to ‘A+’ from ‘AA-‘.

“The downgrade of ICD’s Long-Term IDR to ‘A+’ from ‘AA-‘ reflects Fitch’s downward revision of the bank’s intrinsic rating to ‘bbb+’ from ‘a-‘. As the maximum possible uplift from our ‘aa-‘ assessment of shareholders’ support is three notches, the downward revision of the intrinsic rating has led to a downgrade of ICD’s Long-Term IDR,” explained Fitch in its rating rationale. ICD’s ratings are driven by the support Fitch expects the bank would receive from its key shareholders, IsDB (AAA/Stable) and Saudi Arabia (A/Stable), which own 43% and 24% respectively of the Corporation’s paid-in capital as at end-2019.

“The support assessment,” added Fitch, “is ‘aa-‘, reflecting a weighted average rating of key shareholders of ‘AA’ adjusted down by one notch to reflect a ‘moderate’ propensity to support. The revision in ICD’s intrinsic rating is driven by a one-notch downgrade of our assessment of the bank’s solvency to ‘a-‘ from ‘a’ at the previous review. This reflects expected deterioration in the bank’s capitalisation and asset quality metrics. The non-performing loan (NPL) ratio increased to 14.7% at end-2019 from 13% at end-2018.”

Fitch expects the NPL ratio to increase in the short term due to new NPLs incurred in 2020, and the low credit quality of existing borrowers. “We also expect the bank to continue to experience financial losses over the coming years, which will put downward pressures on capitalisation. The Negative Outlook reflects downside risks related to the bank’s business environment owing to a potential weaker business profile and operating environment. In Fitch’s view, there are heightened execution risks related to ICD’s ongoing ‘de-risking’ strategy and restructuring efforts. In addition, the operating environment is set to be affected by the economic fallout from the COVID-19 pandemic.”

About a third of outstanding loan exposures are to entities located in countries where the sovereign rating is on Negative Outlook. This highlights the deterioration in the macroeconomic conditions in those countries, which will affect the credit quality of non-sovereign entities.

ICD shareholders, especially the Saudi Ministry of Finance and the IsDB, have put pressure on the Corporation to improve its profitability and to raise funds from the capital markets instead of relying too heavily on shareholders’ equity and capital injections.

The Sukuk certificates are listed on the Regulated Market of the London Stock Exchange and on Nasdaq Dubai.  At the bell ringing ceremony at Nasdaq Dubai on 15 October, the Corporation said that the capital raised from the Sukuk will support ICD’s wide-ranging development activities within its 55 member countries, which include creating competition, entrepreneurship, employment opportunities and export potential, as well as encouraging the development of Islamic financing activities such as the debt and equity capital markets.  

ICD’s inaugural US$300 million issuance in 2016 is also listed on Nasdaq Dubai.

According to ICD’s Ayman Sejiny “the Corporation received strong investor interest in our new Sukuk issuance from a wide range of constituencies including fund managers, commercial and private banks and central banks – demonstrating their confidence and support for ICD’s strategy and initiatives in promoting private sector activity.  ICD’s Sukuk listing on Nasdaq Dubai, as the region’s international exchange, provides the Sukuk with excellent links to regional and international investors on a well-regulated platform attracting global visibility.”

Nasdaq Dubai maintained that its growing relationship with the IsDB Group demonstrated its commitment to serving Sharia’a-compliant issuers based regionally and internationally, providing an effective and high-profile listing platform. ICD’s latest listing brings the total value of Sukuk listed in Dubai to US$74.05 billion, underlining the emirate’s status as one of the largest Sukuk listing centres in the world by value.

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