Oman Returns to International Sukuk Market with Benchmark US$1.75bn Sukuk Issuance After an Absence of Almost Three Years as Market Share of Islamic Finance Assets Continue to Rise

The Government of Oman returned to the international market on 15 June 2021 with a Reg S Rule 144A US$1.75 billion Sukuk issuance. The unsubordinated fixed-rate Trust Certificates have a tenor of 9 years, maturing on 15 June 2030. The last time Oman issued a US dollar-denominated Sukuk was in 2018.

The Sukuk certificates were issued by Oman Sovereign Sukuk SAOC, a special purpose vehicle incorporated in the Sultanate of Oman, on behalf of the Obligor, the Government of Oman, under its unlimited Trust Certificate Issuance Programme.

The Debt Management Office of the Ministry of Finance had mandated Citi, Gulf International Bank, HSBC, Standard Chartered, Bank ABC and Bank Muscat to act as Joint Arrangers and Bookrunners for the transaction and to arrange a series of investor calls with accounts in the UK, Europe, the Middle East, Asia and Offshore US Accounts.

The initial price guidance was set at 5.375% to 5.5%, but tightened and was finally priced a fixed coupon rate 4.875% per annum payable semi-annually in arrear on each Periodic Distribution Date.

Oman is a relative newcomer to the Islamic finance sector and is also one of the smaller economies in the Gulf Cooperation Council (GCC) region, and one that has been badly hit by the slump in oil prices and the impact of the coronavirus pandemic. According to the Sukuk prospectus, the Omani economy is projected to have a fiscal deficit OR2.23 billion (US$5.79 billion), or 8.6% of GDP in 2021. The deficit is forecast to decrease to OR1.66 billion in 2022 (5.9% of GDP), OR605 million in 2023 (2% of GDP) and OR165 million in 2024 (0.5% of GDP) respectively.

Oman expects it will continue to have substantial financing needs that will be met partly through privatisations, monetisation of government assets and selective use of domestic funding sources such as government development bonds, Treasury Bills and domestic and international Sukuk issuances.

The Programme and Sukuk certificates have been rated BB- by Fitch Ratings and Ba3 by Moody’s Investor Services. Oman has been assigned a long-term and local currency sovereign credit rating of B+ by Standard & Poor’s (S&P) with a stable outlook, a long-term issuer rating of Ba3 by Moody’s with a negative outlook and a long-term issuer rating of BB- by Fitch with a negative outlook.

Despite its below investment grade rating – the only sovereign together with Bahrain in the GCC to be assigned such a rating – the tightening pricing on this latest Sukuk issuance is tempered by pent-up demand for international Sukuk and the dearth of such issuances.

As such the issuance attracted a large turnout of international investors and asset management institutions this week, with the transaction over-subscribed 6.5 times attracting a final order book exceeding US$11.5 billion. Investor accounts in the GCC, Asia, Europe and the US featured strongly in the final allocation.

Similarly, the Trust Issuance Programme was established on 7 June 2021 and arranged by Citigroup, Standard Chartered Bank, HSBC and JP Morgan, who also acted as dealers together with AlIzz Islamic Bank, Gulf International bank, KFH Capital and Dubai Islamic Bank. The proceeds of the issuance according to the Final Terms will be used for general budgetary purposes.

The Sukuk certificates were listed on the Official List of the UK Financial Conduct Authority and admitted for trading on the Main Market of the London Stock Exchange on 15 June 2021. Off book trading in the first three days after listing saw 2.21 million certificates exchange hands with a total trade value of US$2,249,620.95. By 24 June the certificates were trading at US$102.19.

In the last few years, Oman’s Islamic banking sector growth has grown steadily with more recent acceleration, which Fitch Ratings stressed in its latest report on Oman “is likely to continue apace in 2021-2022 following strong momentum in 2020 despite the impact of the COVID-19 pandemic and lower oil prices.”

In fact, Sharia’a compliant financing in Oman grew by 9.5% in 2020, compared with the conventional banks’ loan growth of 2.1%. The growth is driven by demand for Islamic products, support from conventional banks offering Islamic products through their Islamic windows, and regulations supportive of Islamic finance. The demand encouragingly is also driven by young adults and expatriates.

Moody’s Investor Service has also noted the strengthening demand for Sharia’a-compliant financial products in Oman, with Islamic banking assets under management projected to reach 20-25% of total banking assets in the sultanate by 2025. The rapid growth of Islamic banking assets in Oman has outpaced the growth in conventional assets in recent years. “For Omani banks, the growth in the country’s Islamic banking segment will contribute to asset growth and profitability, particularly in an operating environment weakened by the coronavirus pandemic, low economic growth, weak hydrocarbon prices and slowing overall credit demand,’ added Moody’s.

The Central Bank of Oman in a report in June 2021 confirmed that the country’s Islamic banking entities (banks plus windows) provided financing of OR4.5 billion at the end of April 2021, recording a growth of 11.2% year-on-year (Y-o-Y). Total deposits held with Islamic banks and windows increased by 14.7% to OR4.1 billion. The total assets of Islamic banks and windows increased by 11.6% on a Y-o-Y basis to OR5.5 billion and constituted about 14.6 % of the banking system’s assets as at end-April 2021.

Omani Islamic banks are adequately capitalised with reasonable profitability and asset quality indicators, reflecting conservative regulation and relatively low-risk business models. “But payment holidays and flexibility allowing banks not to classify financing as impaired when payments are deferred mask underlying asset quality. We expect the weakening operating environment to pressure profitability and asset quality in 2021-2022, particularly in the real estate, construction and manufacturing sectors,” said Fitch.

However, the sector’s growth potential is high given Oman’s Muslim-majority demographics and low banking penetration. Only 56% of the adult population had a bank account in 2016, with 14% of adults citing religious reasons for not having an account, according to the World Bank.

The Ministry of Finance is also steadily becoming a more proactive issuer of domestic sovereign Sukuk. Last November, it issued two Omani Rial Sukuk issuances – one an institutional and the other a debut retail offering. According to the Muscat Clearing & Depository ‘Sovereign Sukuk Issue Four’ was issued on 11 November totalling OMR208.1389 million (US$541.3 million) whilst ‘Sovereign Sukuk Issue Five’ was issued on 24 November totalling OMR25 million (US$65.0 million). Both offerings were issued by Oman Sovereign Sukuk S.A.O.C.

Prior to the November issuances, the MoF last issued ‘Sovereign Sukuk Issue Three’ – a Six-Year OMR200 million offering under the OR Sukuk Issuance Programme – on 21 September 2020 at a fixed profit rate of 5.25% per annum payable semi-annually. All three transactions were structured as Sukuk Ijarah (leasing Sukuk) offerings.

The rationale behind the sovereign retail public OR Sukuk offerings is to give ordinary Omani investors access to the capital markets through ultra-retail issuances with low minimum subscriptions. The Omani Rial Sukuk Issuance Programme also forms an integral part of the strategy of the Government to enhance the depth and scale of the overall capital market in Oman, enabling it to play a more vital role in the economic development of country, as well as further developing Oman’s secondary Islamic capital market.

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