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IsDB Issues Debut US$1.5bn Sustainability Sukuk Specifically to Fight Aftermath of Covid-19 in Member Countries

The Islamic Development Bank (IsDB), the multilateral development bank (MDB) of the OIC (Organisation of Islamic Cooperation) countries, has consolidated its financing “to tackle the aftermath of the COVID-19 pandemic in its Member Countries” with the issuance of a debut US$1.5 billion Sustainability Sukuk on 19 June 2020.

This is first Sukuk specifically ring-fenced to mitigate the health and economic impact of the global coronavirus outbreak and the recovery from the pandemic.

The proceeds from the debut sustainability issuance, according to the IsDB, will be exclusively deployed towards social projects under the Bank’s Sustainable Finance Framework (SFF), with a focus on ‘access to essential services’ and ‘SME financing and employment generation’ categories under the umbrellas of the UN’s Sustainable Development Goal (SDG-3) relating to Good Health and Well-Being’ and ‘SDG-8 relating to Decent Work and Economic Growth’ for its 57 Member Countries, to assist them in tackling the aftermath of the COVID-19 pandemic.

The project categories are identified as per the guidelines standards set by from the International Capital Market Association (ICMA) under its Sustainability Bond Guidelines (2018) and Social Bond Principles (2018).”

“The Bank,” stressed IsDB Group President, Dr Bandar Hajjar, “is committed to prioritizing the UN Sustainable Development Goals in accordance with the specific development needs of its Member Countries. As part of these ambitions, IsDB aims to boost its commitment towards sustainability through the potential issuance of Sukuk to finance sustainable investments. The issuance of Sukuk under this Sustainable Finance Framework will enable the Bank to diversify its sources of funding, while enhancing IsDB’s sustainability profile as well as helping the Bank to continue to deliver environmentally sustainable growth in a socially responsible and transparent manner.”

The US$1.5bn Sukuk issuance complements the US$2.3 billion Strategic Preparedness & Response Programme (SPRP), a Covid-19 mitigation financing lifeline to its member countries which the IsDB launched in March. Indeed, the IsDB Group, of all the multilateral development banks including the IMF/World Bank Group, was one of the first MDBs to react to the coronavirus outbreak with an initial financial rescue package. The IsDB’s response to COVID-19 is pillared on the 3Rs – Respond, Restore and Restart – framework in its Member Countries.

The IsDB’s maiden sustainability offering is also the first ever AAA-rated Sustainability Sukuk in the global capital markets. “This is a flagship transaction in the development of social capital markets being the first Sukuk specifically allocated to the fight against COVID-19. It is a testament to IsDB’s efforts in providing assistance to its member countries through its 3Rs approach. The success of this transaction in terms of pricing, size and strong investor interest opens doors for other Sukuk issuers who may consider ESG-linked transactions,” explained Tanguy Claquin, Head of Sustainable Banking at Credit Agricole CIB, one of the mandated lead managers and bookrunners to the transaction.

The IsDB is one of the most proactive and prolific issuers of AAA-rated international Sukuk. This latest sustainability Sukuk is the second issuance by the Bank in 2020. In February it successfully priced its single largest Sukuk issuance ever, raising US$2 billion in 5-year Trust Certificates in the process. There are signs that the IsDB is tapping the international markets more often than previously. By June 2020, the Bank had already equaled its total 2019 issuances volume comprising three Sukuk offerings totaling US$3 billion and €1 billion respectively, with its first two issuances totaling US$3.5 billion. 

The Bank is also increasing its sustainable and Green finance profile and credentials in line with the provisions of its Sustainable Finance Framework. Last November, for instance, it issued its debut €1 billion Green Sukuk based on the Framework.

The latest Sustainable Sukuk too was issued by IsDB Trust Services Limited incorporated in Jersey under the IsDB’s US$25 billion Trust Certificate Issuance Programme launched in September 2019 but amended in June 2020. Leveraging its

Aaa/AAA/AAA by Moody’s Investors Services, Standard & Poor’s (S&P) and Fitch Ratings (all with a stable outlook), the IsDB successfully priced the debut Sustainable Sukuk – 5-year Trust Certificates – at par with a profit rate of 0.908% to be payable on a semi-annual basis.

The pricing is very tight indicating strong demand for the papers in an environment starved of AAA-rated sovereign debt papers. This compared to the US$2 billion Sukuk in February which was priced at par at with a profit rate of 1.809% payable on a semi-annual basis, which according to the Bank was the lowest pricing for its papers since 2016.

Following the successful pricing, Dr. Hajjar maintained that the “debut Sustainability Sukuk is a major fillip for the Bank in its pursuit of tackling the aftermath of the pandemic. The funds raised will contribute towards critical interventions in our Member Countries in these unprecedented times and I would like to thank the Member Countries and the Sukuk investors for their confidence and unwavering trust in IsDB and its mission. With the success of this transaction, I also call upon the Islamic finance industry to promote Sustainable and Social Sukuk as alternate asset classes that have the potential to counter the multi-fold impact of the COVID-19 coronavirus.”

Earlier in June the IsDB had mandated a consortium of banks comprising Citi; Credit Agricole CIB; Emirates NBD; GIB Capital; HSBC; Islamic Corporation for the Development of the Private Sector (ICD), the private sector fund of the IsDB Group; NATIXIS; Société Générale CIB and Standard Chartered Bank to act as the Joint Lead Managers and Joint Bookrunners for the transaction. Kuwait International Bank acted as the co-manager.

The book-building exercise started on Wednesday, 17 June. The initial price thoughts, according to the Bank, were set at Mid Swap (MS) plus 70 basis points (bps). Following strong demand from investors, the deal was eventually priced at MS plus 55 bps, tightening by 15 bps, with an overall profit rate of 0.908%. This is the lowest profit rate ever that the Bank has achieved for a US dollar public Sukuk.

In terms of the final allocation, said the IsDB, the distribution was well diversified with 53% allocated to Middle East & North Africa, 37% to Asia, 8% to Europe, and 2% to others including US Offshore Accounts. Overall, the deal witnessed strong participation from real money accounts and official institutions, a testament of IsDB’s credit strength, as 79% was allocated to central banks and official institutions, 16% to bank treasuries and 5% to fund managers and private banks.

“The attractive pricing achieved in a global market environment which is cautiously opening up,” explained Dr. Zamir Iqbal, the Vice President (Finance) and CFO of IsDB, “once again validates the IsDB’s strong credit and financial position, reaffirmed by its AAA ratings. Coupled with its commitment to tackling the aftermath of COVID-19, it made a compelling story for investors to participate in the orderbook, especially SRI investors. With the debut Sustainability Sukuk, we are delighted to have achieved another milestone in expanding the range of products we offer, and we are proud of supporting the Bank’s COVID-19 response efforts.

“Once again, investors across the board have reaffirmed their faith in our development and sustainability mandate and AAA-rated paper which provides best-in-class risk-adjusted returns. We will work to ensure that this lower cost of funding will contribute towards extending better financing terms to our Member Countries for supporting their critical and emergent needs during this pandemic. “

Similarly, Dr. Gado, the IsDB Treasurer, was encouraged by the investor demand, diversification and perception of IsDB credit risk and financial strength. With this breakthrough deal, the IsDB, he added would continue to achieve its funding objectives as demonstrated by the size and the lowest overall pricing for a public USD Sukuk ever. “Investor perception of our Sukuk has greatly improved since the last public trade in February and we will continue to work on it further when we return to the markets later in the year. The investor diversification we achieved shows that the IsDB sustainable finance story is gaining stronger traction in new markets and we hope to maintain this momentum for future issuances,” he said.

The Trust Certificates are in the process of being listed on the Irish Stock Exchange whose trading arm is Euronext Dublin, NASDAQ Dubai and Bursa Malaysia (under the Exempt Regime).

IsDB Trust Certificates are guaranteed by the IsDB as Obligor. The IsDB Board of Governors, which comprise the Ministers of Finance/Economy of its 57 member countries, is keen for the MDB to fully leverage its ‘AAA’ rating status assigned by the three major international rating agencies for 15 consecutive years, and its “Zero-Risk Weighted” rating assigned by the Bank for International Settlements (BIS) in Basle and the European Banking Authority (EBA) for multilaterals, in its resource mobilisation strategy.

In May, Fitch Ratings affirmed IsDB’s Long-Term Issuer Default Rating (IDR) at ‘AAA’ with a Stable Outlook and the trust certificates issued by IDB Trust Services Ltd also at ‘AAA’. The rating according to Fitch, “is driven by the intrinsic credit quality of the bank with solvency and liquidity both assessed at ‘aaa’. Despite negative pressures on asset quality and capitalisation as a result of the global Covid-19 pandemic, Fitch expects the overall impact on the bank’s credit profile to remain limited.”

The IsDB’s shareholders have endorsed a significant increase to the bank’s paid-in capital that would enable the bank to meet the growing financing needs of member countries while bolstering its capitalization further. The final approval for the capital increase is scheduled later this year in the Board of Governors meeting in Jeddah, which was postponed from its original date on 3-4 April as a result of the Covid-19 outbreak.

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