There is no doubt that the Islamic Development Bank (IsDB) is having a good year as far as its fixed income (Sukuk) issuance strategy is concerned. But it is in innovative Sukuk structures and market segments that the multilateral development bank (MDB) of the 57-member Organisation of Islamic Cooperation (OIC) is taking the lead.
At end April 2021, the IsDB issued its debut Secured Overnight Financing Rate (SOFR)-linked Sukuk, which is also the first such offering in the global capital markets. 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 raised US$400 million through a 3-year Sukuk, maturing in April 2024.
The issuance marks the IsDB’s second Sukuk issuance in the international market so far in 2021, which was similarly issued under the MDB’s recently updated US$25 billion Trust Certificate Issuance Programme, which now incorporates various new risk-free rate mechanics.
The Secured Overnight Financing Rate (SOFR) will be the new global benchmark rate, replacing the London Interbank Offered Rate (LIBOR), which was initially going to be phased out in January 2022, but the deadline was extended to June 2023. The SOFR, according to the IsDB, is a broad measure of the cost of borrowing cash overnight collateralized by US Treasury securities.
The IsDB’ s debut SOFR-linked Sukuk is a 3-year Floating Rate Note (FRN) that raised US$ 400 million from a single investor on a Private Placement basis.
Dr Bandar Hajjar, President of IsDB, reminded that “the Bank continues to stay committed to innovation and this is yet another example. The global shift away from LIBOR will undoubtedly have an impact on IsDB operations in our Member Countries, and I am pleased that our Treasury have successfully closed this transaction as part of IsDB’s high level plan to make our way through this transition at the early stages.” The transaction, he added, is “another pioneering effort of IsDB as the Sukuk market leader in the Islamic capital market.”
S&P assigned a AAA-rating to the Notes making them the first-ever AAA-rated SOFR-linked Sukuk in the Islamic capital market. The Sukuk was priced at par (100%) and the mutually agreed coupon is payable on a quarterly basis.
“We are delighted to achieve another major milestone as a Sukuk market leader,” explained Dr Zamir Iqbal, Vice President (Finance) and CFO of IsDB. “With almost US$22 billion in Sukuk outstanding, it is imperative for IsDB to plan for ensuring a smooth transition away from LIBOR and offer new instruments to investors who are important stakeholders in the transition. We are very grateful for the investor’s confidence in IsDB for this transaction and would like to thank the parties involved in making this a successful execution.”
According to IsDB Head of Treasury, Dr Yasser Gado, as a frequent Sukuk issuer, this was a breakthrough transaction in terms of timing, pricing, Sukuk offerings, investor diversification, as well as testing its modus-operandi for a post-LIBOR landscape. “We intend to continue this momentum in order to secure low-cost funding, strengthen our standing in a new market reality and keep promoting Sukuk as an alternative asset class for sustainable development.”
Zakky Bantan, the Manager of Capital Markets at IsDB, also confirmed that the Bank anticipates “further SOFR-linked Sukuk issuances in order to build IsDB’s SOFR-linked curve. We will also continue our efforts for other risk-free rate issuances soon.”
This issuance follows the US$2.5 billion Sustainability Sukuk issued by the IsDB on 25 March 2021. That 5-year issuance was the MDB’s biggest US dollar public issuance to date and was issued by IsDB Trust Services Limited incorporated in Jersey also under the IsDB’s US$25 billion Trust Certificate Issuance Programme. It was priced at par with a profit rate of 1.262%, payable on a semi-annual basis.
The Bank 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 5-year 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. It was priced tighter at par with a profit rate of 0.908% payable on a semi-annual basis.
The IsDB is also one of the most proactive multilaterals in fast tracking a number of COVID-19 mitigation packages for its member countries. It cooperates with several MDBs especially through co-financing and co-investment in projects, development and trade. IsDB President Dr Hajjar is a keen proponent of vaccine accessibility and equity, especially for low income countries.
In April 2021, Dr Hajjar told the first meeting of the Heads of Multilateral Development Banks (MDBs) in 2021 that “building a unifying vision on vaccines’ was crucial.” He revealed that the IsDB Group has launched a US$850 million “IsDB COVID-19 Vaccine Access Facility (IVAC)” based on a comprehensive approach inclusive of vaccine development, manufacturing, procuring, and delivery to end beneficiaries. “We would be happy to align with MDBs in all aspects including country programming and delivery. If we could ensure COVID-19 vaccine equitable access to all people through the COVAX programme, this will support our Member Countries to make real progress as some economies are entering severe recessions,” he underlined.
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.”
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.