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IsDB Issues Largest Ever US$2.5bn Sustainability Sukuk as Part of its Wide-ranging Response to COVID-19 Economic Recovery in Member Countries

The Islamic Development Bank (IsDB), the multilateral development bank (MDB) of the OIC (Organisation of Islamic Cooperation) countries, successfully priced its first public debt issuance in 2021 – a US$2.5 billion Sustainability Sukuk on 25 March.

Leveraging its Aaa/AAA/AAA by Moody’s Investors Services, Standard & Poor’s (S&P) and Fitch Ratings (all with a stable outlook), the 5-year Sukuk, said the IsDB was its biggest US$ public issuance to date.

This 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. It was priced at par with a profit rate of 1.262%, payable on a semi-annual basis.

The IsDB pioneered Sustainability Sukuk in June 2020 when it issued its debut US$1.5 billion such offering, the proceeds of which were used “to tackle the economic aftermath of the COVID-19 pandemic in its Member Countries.” That issue was the first Sukuk specifically ring-fenced to mitigate the health and economic impact of the global coronavirus outbreak and the recovery from the pandemic. That 5-year issue in contrast was priced tighter at par with a profit rate of 0.908% payable on a semi-annual basis.

The only other Sustainability Sukuk issuance by a MDB or quasi-sovereign issuer is the debut 3-year RM100 million ASEAN Sustainability SRI Sukuk issued by Cagamas Berhad, the National Mortgage Corporation of Malaysia, last October.

The IsDB mandated a consortium of banks to handle this second Sustainability Sukuk transaction. It included Citi, HSBC, Goldman Sachs International, NATIXIS, Société Générale, Standard Chartered Bank and Warba Bank as Joint Lead Managers and Joint Bookrunners for this issuance. In addition, Kuwait International Bank acted as the Co-manager.

The transaction was announced on 22 March and the initial price thoughts were set around the Mid Swap (MS) + 39 basis points (bps) area. With strong demand from investors, the deal was eventually priced at MS + 33 bps, tightening by 6 bps, with an overall profit rate of 1.262% as against the previous largest US$ issuance in February 2020, which had a profit rate of 1.809%. According to the IsDB, this latest US$2.5 billion Sukuk is one of the lowest profit rates that the Bank has achieved for a US$ public Sukuk.

The proceeds of this latest Sustainability Sukuk will similarly be allocated to the Finance/Refinance Green (10%) and Social Development projects (90%) that are eligible under the IsDB’ s Sustainable Finance Framework. This Framework was created in line with the Green Bond Standards, Social Bond Standards and Sustainability Bond Guidelines published by the International Capital Market Association (ICMA).

The issuance, says the IsDB, is also the second AAA-rated Sustainability Sukuk in the global capital markets and complements the initiatives that the Bank has undertaken as part of its wide-ranging response to COVID-19 for its Member Countries. It marks the third trade based on the Bank’s Sustainable Finance Framework.

Not surprisingly, IsDB President, Dr. Bandar Hajjar is confident that “as the world continues to find better ways to respond to the ongoing pandemic, the IsDB is leading with its role of mobilizing critically needed resources at low cost for its Member Countries in order to finance a green and resilient recovery. This is our second Sustainability Sukuk and also our largest issuance ever, once again reaffirming the demand for financing promoting sustainability in a world stricken with climate emergency as well as a raging pandemic.

“It, also, demonstrates the strong confidence and trust that the investor community places in IsDB and its mission, for which we are very thankful. I, once again, call upon all stakeholders in the Islamic finance industry to promote both the Green and Sustainability Sukuk markets as innovative solutions to address the global challenges we face today, for a better future.”

The issuance, according to the IsDB, attracted strong demand from real money investors looking for value and this was validated by IsDB’s robust credit and financial position and reaffirmed by its AAA ratings. Due to the high demand, the Bank was able to tighten the pricing by more than 15% between announcement and closing. Indeed, to Dr Zamir Iqbal, the Vice President (Finance) and CFO of IsDB, “the range of investors have once again reposed their faith in our AAA-rated paper which provides best-in-class risk-adjusted returns. The lower cost of funding will enable IsDB to extend better financing terms to our Member Countries for supporting their critical needs during, and post, pandemic. We are also pleased to see new investors participating in the Sukuk.”

These sentiments were echoed by Maud Le Moine, the Head of SSA Debt Capital Markets at Goldman Sachs International, stressing that the transaction was “truly remarkable.”

“The quality of the orderbook and broad-based demand from investors warranted a 6 bps move for a final spread of MS+33bps, one of their tightest historical prints. Huge congratulations to the IsDB team for a successful transaction by any metric – demand, pricing, timing and sizing outcome,” added Le Moine.

In terms of the final allocation, the distribution was well diversified with 61% allocated to Middle East & North Africa accounts, 24% to Asia, 13% to Europe, and 2% to others, including US offshore accounts. Overall, the deal witnessed strong participation from real money accounts and financial institutions as well as a number of first-time investors, a testament of IsDB’s credit strength, as 78% was allocated to central banks and financial institutions, 18% to bank treasuries and 4% to fund managers, private banks and others.

Similarly, Dr. Yasser Gado, IsDB Treasurer reiterated that the “IsDB’ s largest-ever Sukuk issuance, since it became a frequent issuer back in 2009, plays a vital role toward accomplishing the bank’s ambitious funding plan for 2021. The size of the transaction, lower credit spread, and robust order book mirrored investors’ confidence in IsDB credit. We are delighted to see IsDB transactions acquiring new institutional investors with pace and determination.

The IsDB is one of the most proactive and prolific issuers of AAA-rated international Sukuk. There are signs that the IsDB is tapping the international markets more often than previously partly driven by the impact of the pandemic and the increasing demands from member countries for help towards post-pandemic economic recovery. As such, more substantial Sukuk issuances are expected this year into 2022.

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. “IsDB,” confirmed Dr Gado, “will continue its commitment to promote the awareness of Sukuk, as the renowned Sharia’a compliant debt instrument within capital markets. We aim to build upon the momentum of the IsDB sustainable finance story for both climate as well as social development projects in our Member Countries.”

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.

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.

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