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Indonesia Notches up Another First With Latest Three-tranche US$3bn Sukuk Offering Including the First 30-Year Green Sukuk in the World

For a regular annual issuer of sovereign Sukuk, the Government of Indonesia is adept at notching up global firsts in its issuance programme and strategy. This is particularly so in the international and Green Sukuk space where Jakarta has been leading the way in several issuance metrics.

Its latest offering, a three-tranche US$3 billion Sukuk Wakala, launched at end May and closed on 3 June 2021 is no exception. The issuance comprised a US$1.25 billion 5-year tranche maturing in June 2026; a US$1 billion 10-year tranche maturing in June 2031; and a US$750 million 30-year (Green) Reg S/144A Trust Certificate tranche due in June 2051.

The Wakala Sukuk was issued through Perusahaan Penerbit SBSN Indonesia III (PPSI-III), a legal entity established by the Ministry of Finance on behalf of the Obligor, the Republic of Indonesia, solely for the purpose of issuing Sharia’a compliant securities in foreign currencies in the international markets.

The Indonesian Ministry of Finance mandated Dubai Islamic Bank, CIMB, Citibank, HSBC and Standard Chartered as Joint Lead Managers and Joint Bookrunners to arrange a series of investors meetings and calls in several international markets in the UK, Europe, the Middle East, Asia and with Offshore US Accounts. HSBC and Standard Chartered Bank also acted as Joint Green Structuring Advisors. The local PT Danareksa Sekuritas and PT PT Trimegah Sekuritas Indonesia Tbk acted as Co-Managers for the transaction.

This latest Sukuk Wakalah issuance, like the previous ones, is pursuant to the US$10 billion Trust Certificate Issuance Programme launched by Indonesia in May 2015 through PPSI-III. This is the twelfth US dollar-denominated Sukuk issuance by Indonesia and the tenth issuance under its Trust Certificate Issuance Programme.

According to the Directorate General of Budget Financing & Risk Management at the Indonesian Ministry of Finance, the initial price guidance of 1.90%, 3.00% and 4.00% for the 5-year, 10-year and 30-year Green tranches were set taking advantage of a steady market opening in Asia on the morning of 2 June 2021.

The demand dynamics, despite a difficult COVID-impacted international economic environment, saw the initial price guidance compress by 40 basis points (bps) on the 5-year tranche and by 45 bps on the 10-year and 30-year tranches, with the Wakala Sukuk finally being priced at par at yield and a profit rate of 1.50% on the 5-year tranche, 2.55% on the 10-year tranche and 3.55% on the 30-year tranche. The final order size amounted to US$10.3 billion or an oversubscription rate of more than 3.43 times of the target US$3 billion issuance.

According to the Directorate of Budget Financing & Risk Management, the transaction achieved several notable milestones. These include: i) The lowest ever 5, 10 and 30-year yield spread over UST and profit rate achieved by the Republic of Indonesia for global Sukuk issuance; ii) The first ever 30-year and the longest Green Sukuk issuance in the world, and iii) A robust investor order book that allowed pricing below fair value across all tranches.

Indonesia introduced a Green format to the 30-year Sukuk for the first time since its debut Sukuk issue in 2018. This issuance, stressed the Ministry of Finance underlines “the Government’s dedication and long-term commitment to green and sustainable financing, as well as to pioneering financing methods in the effort against climate change.”

The 30-year tranche Green Sukuk is the fourth global Green Sukuk issued under the country’s Green Bond and Sukuk Framework. “Indonesia as the first Sovereign Global Issuer of Green Sukuk and now with its fourth such transaction, proves that it is committed to the 2016 Paris Climate Agreement and has shown promising development in its diverse environmental conservation projects and attracting foreign investors who are shifting towards sustainable corporate practices specifically towards Sharia’a-based sustainable financing,” added the Ministry of Finance.

Indonesia is the world’s most proactive issuer of Green Sukuk. The 2021 30-year US$750 million Green Sukuk is the fourth global Green Sukuk issued by Jakarta outside the retail Green Sukuk issued at the end of 2019. Jakarta issued a US$750 million Green Sukuk Wakala with a tenor of 5 years in June 2020 as part of a US$2.5bn three-tranche transaction; a similar US$750 million Green Sukuk Wakala with 5.5 year tenor in February 2019 as part of an US$2 billion transaction; and a 5-year US$1.25 billion Reg S/144A Green Sukuk Wakala in February 2018, which was part of a two-tranche US$3 billion transaction.

The proceeds from the Green Sukuk according to the Directorate General “will be used to finance or refinance expenditure directly related to ‘eligible Green Projects’ as defined in Indonesia’s Green Bond & Green Sukuk Framework.” In contrast the proceeds from the other tranches will be used to meet part of the Indonesian Government’s general financing requirements as per the government’s Covid-mitigation and response emergency financing package.

The Sukuk are structured based on the Sharia’s principle of Wakala (Agency) and the issue is accompanied by a Sharia’a opinion from DSN MUI Sharia’a Council as well as from various international Islamic scholars and boards. The transaction is aligned with the Indonesia’s plan to finance the state budget, as well as its intention to develop and improve the liquidity of the Sukuk market in the region.

The underlying Sukuk Wakala assets, confirmed the Directorate General in a statement, comprise a pool of state-owned assets including land and buildings (accounting for 51 per cent of the asset pool) and project assets that are under construction or to be constructed (accounting for the remaining 49 per cent of the asset pool).

The transaction received large orders from global investors who are well qualified and diversified, reinforcing the robustness and the depth of the Sukuk market and demonstrates strong investor appetite for Indonesia.

The 5-year tranche generated a geographic distribution of 34% to Asia (ex-Indonesia); 33% to Islamic and Middle East investors, 16% to Indonesian investors, 10% to investors in Europe; and 7% to USA offshore accounts. By investor type, the tranche was allocated 41% to banks, 30% to central banks/sovereign wealth funds/agencies, 23% to fund managers, 4% to insurance / pension funds and 2% to private banks and others.

The 10-year tranche generated a geographic distribution of 29% to Islamic and Middle East investors, 6% to Indonesian investors, 35% to Asian investors (ex-Indonesia), 12% to USA offshore accounts and 18% to investors in Europe. By investor type, the tranche was allocated 40% to fund managers, 36% to banks, 12% to central banks/sovereign wealth funds/agencies, 10% to insurance/pension funds and 2% to private banks and others.

The 30-year Green Sukuk tranche generated a geographic distribution of 8% to Islamic and Middle East investors, 5% to Indonesian investors, 34% to Asian investors (ex-Indonesia), 27% to USA offshore accounts and 25% to investors in Europe. By investor type, the tranche is allocated 63% to fund managers, 19% to banks, 12% to insurance/pension funds, 5% to central banks/sovereign wealth funds/agencies and 1% to private banks and others.

The Wakala Sukuk are listed on the Singapore Stock Exchange and NASDAQ Dubai. Each tranche of certificates has been assigned a rating of Baa2 by Moody’s Investor Service, BBB by S&P Global Ratings Services and BBB by Fitch Ratings.

Green bonds are a growing category of fixed-income securities, and Green Sukuk could widen the appeal of Sukuk beyond its traditional markets in Asia and the Middle East to include ethical investors in Western countries. However, Green Sukuk issuance has still a long way to go to catch up with Green bond issuance.

Indonesia is the only sovereign issuer of Green Sukuk, while Malaysia has pioneered corporate Green Sukuk with about six such issuances in the market to date issued by Chinese-backed entities such as Tadau Energy, Quantam Solar and Cypark Resources. In addition, Cagamas Berhad (the National Mortgage Finance Corporation of Malaysia), Majid Al Futtaim (MAF), a leading shopping mall developer across the Middle East, and the Islamic Development Bank (IsDB) also successfully priced their maiden Green Sukuk issuances in 2020.

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