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Indonesia Returns to Market with US$2.5bn Triple-Tranche Sukuk Wakala including a Third US$750m Global Green Sukuk

The Government of Indonesia returned to the global Sukuk market on 17 June 2020 through the issuance of a three-tranche US$2.5 billion Sukuk Wakala in the international market in 144A/ Reg S Trust Certificate format. 

According to the Directorate General of Budget Financing & Risk Management at the Indonesian Ministry of Finance, the issuance comprised a 5-year US$750 million Green Sukuk tranche; a 10-year US$1 billion Regular Global Sukuk tranche; and a 30-year US$750 million Regular Global Sukuk tranche – all under the Wakala (agency) structure.

In a statement, the Directorate General of Budget Financing & Risk Management emphasised that “the Government continues to show its commitment, leadership and contribution for sustainable financing by dedicating the 5-year tranche as Green Sukuk for climate change financing. Indonesia as the first Sovereign Global Issuer of Green Sukuk and now with its third 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.”

Indonesia is the world’s most proactive issuer of Green Sukuk. The 2020 5-year Green Sukuk is the third 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 5.5 years in February 2019 as part of an US$2 billion transaction; and a similar 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 June 2020 5-year US$750 million Green Sukuk Wakala tranche offering was priced on 16 June at par with yield of 2.30% per annum. This compared with the pricing of the February 2019 Green Sukuk of 3.9% per annum and that of the February 2018 Green Sukuk at a profit rate of 3.75% per annum.

The pricing for the June 2020 10-year US$1 billion Regular Global Sukuk Wakala tranche was 2.80% per annum, compared with the 4.45% per annum profit rate of the 10-year US$1.25 billion Regular Global Sukuk Wakala tranche in February 2019, and the 4.4% per annum profit rate of the 10-year US$1.75 billion Regular Global Sukuk Wakala tranche in February 2018.

The yield for the June 2020 30-year Regular Global Sukuk Wakala tranche is priced at 3.80% per annum.

“The US$2.5 billion transaction is in line with the Government’s financial objectives including financing its fiscal expenditures to handle the impact of Covid-19 pandemic as well as strengthening Indonesia’s position in the global Sharia’a finance market and supporting the development of Sharia’a financing in the Asia region.

This latest Sukuk offerings like the previous ones in 2019/2018, were issued via Perusahaan Penerbit SBSN Indonesia lII (PPSl-lll), a legal entity established by the Indonesian Ministry of Finance solely for the purpose of issuing Shariah compliant securities in foreign currencies in the international markets.  The Sukuk Wakalah issuance is also pursuant to the US$10 billion Trust Certificate Issuance Programme launched by Indonesia in May 2015 through PPSI-III, which is the issuer and trustee for this latest offering.  This is the eleventh US dollar-denominated Sukuk issuance by Indonesia and the ninth issuance under its Trust Certificate Issuance Programme.

This latest US$2.5 billion issuance saw robust demand from investors. “This transaction took advantage of an opportunistic window within a period of heightened volatility in the global capital markets and received positive response from global and domestic investors with an order size of US$16.66 billion or oversubscription of close to 6.7 times above the Government’s target of a US$2.5 billion issuance,” emphasised the Directorate General. 

The Indonesian Ministry of Finance mandated Dubai Islamic Bank, Maybank Berhad, HSBC, BNP Paribas and Standard Chartered as Joint Lead Managers and Joint Bookrunners. BNP Paribas and HSBC 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. 

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 Regular Global Sukuk 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 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 Sukuk are structured based on the Sharia’a principle of Wakala (Agency) and approval for the structure was obtained from DSN MUI Shariah Council as well as international Islamic scholars.

According to the Directorate General, the transactions saw several notable achievements. These included:

  1. The lowest ever 5-year and 10-year yield achieved by the Government across both conventional and Sukuk issuances in the US dollar market;
  2. The first ever 30-year Sukuk issuance by the Government with the lowest coupon ever of Global Sukuk issuance in the world;
  • The largest ever 30-year Sukuk from Asia; and
  1. An oversubscription of 6.7 times.

“With the size of orderbook, the Government was able to tighten the pricing down by 70 basis points from the initial price guidance (IPG) for both regular Sukuk tranches and well below its indicative fair value. The transaction is in line with the Republic’s ongoing objectives to strengthen the global Islamic financial market and commit to environmentally sustainable green funding,” added the Directorate General.

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 32% to Islamic and Middle East investors, 5% to Indonesian investors, 40% to Asian investors (excluding Indonesia), 12% to USA offshore accounts and 12% to investors in Europe. The 10-year tranche generated a geographic distribution of 31% to Islamic and Middle East investors, 5% to Indonesian investors, 34% to Asian investors (ex-Indonesia), 18% to USA offshore accounts and 12% to investors in Europe. The 30-year tranche generated a geographic distribution of 10% to Islamic and Middle East investors, 5% to Indonesian investors, 44% to Asian investors (ex-Indonesia), 8% to USA offshore accounts and 33% to investors in Europe.

“The statistical outcome of this issuance,” maintained the Directorate General in its statement,” proves that foreign investors are confident in Indonesia’s environmental preservation effort, Islamic finance development and state financing.”

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 pioneered by Chinese-backed entities such as Tadau Energy, Quantam Solar and Cypark Resources.

In May last year Majid Al Futtaim (MAF), a leading shopping mall, communities, retail and leisure developer across the Middle East, Africa and Asia, successfully closed a debut US$600 million benchmark Green Sukuk.

Last November, the Islamic Development Bank (IsDB) also successfully priced its maiden Green Sukuk, raising EUR1 billion in 5-year Trust Certificates under its US$25 billion Trust Certificate Issuance Programme. The Sukuk was priced at par with a profit rate of 0.037%, to be payable on an annual basis, making it the lowest ever profit rate for a Euro issuance by the Bank.

In the same Sustainable and Responsible Finance paradigm, the IsDB issued its maiden US$1.5 billion Sustainability Sukuk on 19 June 2020 specifically ring-fenced “to tackle the aftermath of the COVID-19 pandemic in its Member Countries.”

All the tranches of the latest Sukuk issuance are listed on the Singapore Stock Exchange and NASDAQ Dubai, and have been assigned a rating of Baa2 by Moody’s Investors Service, BBB by S&P Global Ratings and BBB by Fitch Ratings.

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