Kuveyt Türk Katilim Bankasi (KTKB), the Turkish subsidiary of Kuwait Finance House and one of the largest participation banks in terms of assets, returned to the international Sukuk market in early September 2021, with a US$350 million Sustainable Basle-III Compliant Tier II Sukuk.
The Sukuk certificates were issued through KT21 T2 Company Limited, a Cayman Islands incorporated special purpose vehicle wholly owned by the Obligor, Kuveyt Turk Participation Bank. The bank had mandated Bank ABC, Citi, Dubai Islamic Bank, Emirates NBD Capital, KFH Capital and HSBC in August to act as joint lead managers and bookrunners to the transaction and to arrange a series of investor calls in the UK, Europe, the Middle East and Asia, and with Offshore US Accounts.
According to Ufuk Uyan, CEO of KTKB, the transaction was a priced at a coupon of 6.125% per annum which “is the lowest issued price of a Tier II issuance since 2017 in Turkey reflecting the Bank’s strong fundamentals and positive market sentiments.”
The landmark offering added Mr Uyan was also the first ever sustainable Tier II Sukuk issued in Turkey and “the world’s first regulatory capital Tier II Environmental, Social and Governance (ESG) Islamic compliant trust certificates. An amount equal to the net proceeds will be applied to finance and/or refinance eligible green and/or social projects in accordance with Kuveyt Türk’s Sustainable Finance Framework.”
Demand for the certificates was robust with the issuance oversubscribed 12 times and reaching in excess of US$4.2 billion. It was geographically widespread with strong participation of over 100 international investors from Europe, UK, Offshore US Accounts, Asia and the Middle East. Some 24% of the allocation went to non-GCC investors and an overall 20% to dedicated green and social fund investors. According to KTBT, this was the highest oversubscription received for any Kuveyt Turk commercial paper up to now, and the second highest among financial institutions in Turkey. The issuance has a maturity of 10 years in September 2031, with a 5-Year early redemption option in September 2026.
Kuveyt Turk is a pioneer of corporate Sukuk issuance in Turkey – both in the domestic Turkish Lira and international US dollar and Euro markets – since its debut US dollar offering in 2021. Its Sukuk issuance momentum continued even during the onset of the COVID-19 pandemic when other participation banks retreated from the international market. Its last three forays into the international market were in 2016 with a 5-year US$500 million Sukuk priced at a coupon of 5.136% p.a. maturing on 2 November 2021; a US$200 million Perpetual Sukuk in July 2019 priced at a coupon of 9.13% p.a.; and a US$50 million Perpetual Sukuk in September 2020 priced at a coupon of 9.95% p.a.
The issuance underlines the steady albeit fragmented momentum of the industry towards the global sustainability, ESG, SRI, SDG and Green Finance agenda. “I believe that KTKB and Islamic banks per se,” explains Ufuk Uyan, “are sustainable banks in essence. We adhere to the principles of Islam, not to exhaust nature but to preserve it. The proscription of interest and usury is a defining sustainability factor and ESG Framework is a built-in characteristic of Islamic Banks. We are happy to be a part of this issuance and will continue to monitor investment of the proceeds.”
The rationale behind the Tier II issuance explains Mr Uyan, “is based on our regulatory perspective. Kuveyt Turk takes necessary actions to maintains its capital adequacy ratio (CAR) at a certain required level as per BRSA (Banking Regulation and Supervisory Agency) requirements as well as the local market average. As it is structured as a sustainable issuance, the use of proceeds will finance green and social projects of Kuveyt Turk with a look back period of 3 years. KT has a strong portfolio of customer deposit with an increasing trend over the years accounting for about 81% of the Bank’s total assets.”
This is tied to the maturity profile of the issuance which includes the option to redeem the amount after 5 years. “It means that if the Certificates are not redeemed on or prior to the reset Date – the Periodic Distribution Amount will be reset to the Relevant 5 Year Reset Rate plus a margin. As per the sustainable assets universe, more than 60% of sustainable asset constitute renewable energy plants, which have a steady cash generation under the Turkish government’s energy purchase guarantee,” he adds.
Uyan, a doyen of the Turkish participation banking sector, believes the upward growth trajectory of the sector and Sukuk issuance in Turkey – both domestic and the international sovereign and corporate issuances – will continue to increase, especially to benefit from the excess liquidity available in the market and the expectation of a price increase in the market. He remains confident that the participation banking sector is on the right track to gain more market share in terms of the total banking sector assets in the medium-term.
“The market share of Participation banking assets of the total banking sector as end December 2020,” reminds Mr Uyan, “stood at 7.2%. Participation banks increased their assets by 54% in 2020 while the growth for the total banking sector was 36%. This year, the Participation Banks Association of Turkey renewed its strategy and adopted a main target of 15% market share of total assets of the banking system by 2025. Adoption of digitisation in the financial services industry will be one of the core determinants of the future of the industry.”
The Sukuk certificates are listed on the Irish Stock Exchange (Euronext Dublin).