IsDB Gives Green Finance and Sukuk a Major Market Making Boost With its Debut €1bn Green Sukuk With More Such Issuances in the Offing

Green Sukuk and Green finance received a major boost in November 2019 following the establishment of a Sustainable Finance Framework (SFF) by the Islamic Development Bank (IsDB) Group, and the agreement signed during the Luxembourg Sukuk Summit in early November between the IsDB and the European Investment Bank (EIB) to strengthen cooperation and to commit US$1 billion each in co-financing green projects through to 2024.

Under the agreement, the funds will be invested in African and Middle Eastern countries, particularly fragile countries where financing will be used for job creation and growth, infrastructure development, support for climate action and development of technology and innovation.

Perhaps even more notably, on 27 November, the IsDB went one step further by successfully pricing its maiden Green Sukuk. The supranational raised 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.

This is the IsDB’s third public issuance in 2019. In September the IsDB successfully priced a US$1.5 billion 5-year Sukuk Wakalah transaction at par at 1.975% per annum, to be payable on a semi-annual basis. This was preceded by a similar US$1.5 billion Sukuk issuance in April 2019 which had a profit rate of 2.843%.

For its debut Green Sukuk, the IsDB had mandated Citi, First Abu Dhabi Bank, HSBC, Landesbank Baden-Württemberg, Natixis, Société Générale, Warba Bank and Standard Chartered Bank as the Joint Lead Managers and Joint Bookrunners for the transaction, including arranging a series of investor meetings primarily in Europe.

In a statement, the IsDB stressed that the proceeds from the debut Green issuance will be deployed towards a range of climate-change and green projects in its 57-member countries. These include projects for renewable energy, clean transportation, energy efficiency, pollution prevention and control, environmentally sustainable management of natural living resources and land use, and sustainable water and wastewater management.

The landmark issuance, which was announced by Dr. Bandar Hajjar, IsDB President, at the IsDB Sukuk Summit 2019 in Luxembourg in early November, is the inaugural transaction based on the bank’s recently created Sustainable Finance Framework.  It is also the first ever AAA-rated Green Sukuk in the global capital markets.

The Framework, which was created in line with the IsDB President’s Five-Year Programme (P5P), lays the foundation for the issuance of Green and Sustainable Sukuk by the IsDB in order to attract Socially Responsible Investors as well as environmentally-conscious ones across the globe for financing the UN’s SDGs in the IsDB Member Countries.

The roadshow was conducted in the week of 18-22 November in London, Paris, Amsterdam, and Frankfurt. With the start of the book-building exercise, the initial price thoughts were set at the Mid Swap (MS) plus 31 (bps) area. Following a strong demand from investors, the deal was eventually priced at MS plus 28bps, with an overall profit rate of 0.037% compared to the IsDB’s Euro issuance last year which had a profit rate of 0.554% with a spread of 5-Year EUR MS plus 20 bps.

In terms of the final allocation, the distribution was well diversified with 51% allocated to Middle East & North Africa, 38% to Europe, 6% to Asia and 5% to others. Overall, the deal witnessed strong participation from real money accounts and official institutions, a testament of the IsDB’s credit strength, as 61% was allocated to bank treasuries, fund managers and private banks and 39% to central banks and official institutions.

Dr. Bandar Hajjar, President of the IsDB Group, stressed that with this landmark Green Sukuk, “the IsDB has reaffirmed its longstanding commitment to play a catalytic role in efficiently mobilizing resources for core SDG sectors in our Member Countries, thereby helping them to progress towards achieving the SDGs. We are very pleased with the outcome of the deal in terms of size, lower pricing and a high number of diversified investors. We are also happy to see new investors subscribing to IsDB Sukuk. We look forward to further harnessing the capital markets to mobilize resources through more innovative transactions in the future.”

The IsDB Trust Certificates are guaranteed by the IsDB as Obligor, and have been assigned a rating of AAA, Aaa and AAA by S&P, Moody’s and Fitch respectively.  This comes on the back of the recent affirmation by Fitch of the IsDB’s Long-Term Issuer Default Rating (IDR) at ‘AAA’ with a Stable Outlook, and the Short-Term IDR at ‘F1+’.  Similarly, Moody’s also affirmed the IsDB’s AAA rating with a stable outlook.

The Trust Certificates are in the process of being listed on Euronext Dublin, NASDAQ Dubai and Bursa Malaysia (under the Exempt Regime).

The IsDB debut Green Sukuk and its stated intention of issuing more such offerings in the future is a boost to the Green Sukuk market. Despite much talk about Islamic Green finance and Sukuk, the rhetoric has been largely aspirational as opposed to actual issuances. Bankers hope that the IsDB Green Sukuk could act as a market maker for more Green Sukuk in 2020 and beyond.

According to the Climate Bonds Initiative global green bond issuances reached US$107 billion mark in June this year. While Green bonds are a growing category of fixed-income securities, which raise capital for projects with environmental benefits, it remains a small fraction of the global bond market.

This development in Green finance has sparked off activity in Islamic Green finance and Sukuk but this has been fragmented and limited, primarily confined to Malaysia, Indonesia and the UAE.

Indonesia is the only sovereign issuer of Green Sukuk – a US$750 million Global Green Sukuk issued in February 2019 with a tenor of 5.5 years maturing on 20 August 2024, and the world’s first sovereign Green Sukuk – a 5-year US$1.25 billion Reg S/144A Wakalah Sukuk issued in February 2018. 

Malaysia has pioneered corporate Green sukuk with six such issuances in the market to date, pioneered by Chinese-backed entities such as Tadau Energy, Quantam Solar and Cypark Resources.

In May this year Majid Al Futtaim (MAF), a leading shopping mall, communities, retail and leisure developer across the Middle East, Africa and Asia, successfully closed its latest Sukuk issuance in May 2019 – a US$600 million benchmark Green Sukuk.

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