Sukuk issuances linked to Sustainability, ESG, SRI and Green Finance continue to gain momentum in the global Islamic capital market, albeit the pace of issuances could be even more urgent given the huge challenges OIC countries are faced with in terms of climate adaptation costs and finance and transition to clean energy.
In the wake of the Glasgow Climate Pact following the COP26 Climate Conference, this transition for emerging countries will be difficult, given also that many of the OIC countries are primary commodity producers including agriculture and fossil fuels – oil, gas and coal – and dependent on these revenues to finance their budgets and development.
The latest institution to issue a Sustainability Sukuk is Saudi Arabia’s Riyad Bank, which is 43% indirectly owned by the Saudi government. The bank successfully closed its latest Sukuk offering with a benchmark US$750 million Perpetual Additional Tier 1 (AT1) Wakala Sukuk issuance linked to sustainability.
In a disclosure to Tadawul (the Saudi Stock Exchange), Riyad Bank confirmed that it has completed the offer of a US$750 million Tier 1 Capital Sukuk through a special purpose vehicle (SPV) to “eligible investors in the Kingdom of Saudi Arabia and internationally.”
In February 2022, Riyad Bank published its Sustainable Finance Framework, published on Feb. 7, 2022, which S&P Global says is aligned to ICMA’s Sustainability Bond Guidelines, Social Bond Principles and its Green Bond Principles 2021; LMA/LSTA/APLMA’s Social Loans Principles and its Green Loan Principles 2021.
The bank’s sustainability objectives are aligned with Saudi Arabia’s Vision 2030 agenda, which targets expanding and diversifying the economy, enabling social responsibility, and increasing employment, among other goals. The bank plans to achieve these objectives through its Bukra strategy. Launched in 2019, the strategy is defined through four key pillars: environment, community, economy, and knowledge.
According to S&P Global, Riyad Bank’s Sustainable Finance Framework “will help achieve these goals through the targeted financing of relevant green and social initiatives. These initiatives include social projects that target small businesses and parts of the population that lack access to basic infrastructure and essential services among others, as well as green projects that support the energy transition in Saudi Arabia.”
The Sukuk certificates were issued by Cayman Island incorporated Riyad Sukuk Limited on behalf of the obligor, Riyad Bank, under the SPV’s US$3bn Trust Certificates Issuance Programmes, established in 2020.
The Sukuk issuance was prices at 4% per annum. Demand for the issuance was robust and the transaction was oversubscribed four times with the order book exceeding US$3 billion. The yield was consequently tightened from the initial price guidance of around 4.375%.
The bank had mandated HSBC, Merrill Lynch International, Riyad Capital and Standard Chartered Bank to act as Joint Lead Managers and Bookrunners on the transaction, and to arrange a series of investor calls with accounts in London, the EU, the GCC, Asia and Offshore US.
Additional Tier 1 bonds, the riskiest debt instruments banks can issue, are designed to be perpetual but issuers can redeem them after a specified period. Riyad Bank’s AT1 Sukuk is non-callable for five and a half years.
Riyad Bank’s previous foray into the Sukuk market was in February 2021 when it successfully closed a SAR3 billion (US$799.52 million) Tier 2 capital eligible Sukuk. The Sukuk was issued under the bank’s domestic SAR-denominated Sukuk Issuance Programme of up to SAR10 billion established in January 2021. The issuance was priced at a rate of return of 6 Months SAIBOR (Saudi Interbank Offered Rate) plus 150 basis points (bps).
Riyad Bank last issued a US dollar Sukuk in the international market in February 2020 when it issued a US$1.5 billion Sukuk with a rate of return of 5-Year Mid Swaps (MS) plus 180 bps. That issuance was more than seven times oversubscribed. Those Sukuk certificates have a tenor of 10 years callable at Year 5.
Fitch Ratings at end January 2022 affirmed Riyad Bank’s Long-Term Issuer Default Rating (IDR) at ‘BBB+’ with Stable Outlook, and the Bank’s Viability Rating (VR) and a Government Support Rating (GSR) both of ‘bbb+’.
The rating rationale is partly underpinned by “a high probability of support for Riyad Bank from the Saudi Arabian authorities given that a significant proportion of Saudi banks’ funding is related to the government and they would likely need support at a time when the sovereign itself is experiencing some form of stress.”
The rating rationale is driven by Riyad Bank’s “well-established and improving company profile, sound capitalisation, strong profitability and healthy funding and liquidity. It also captures sound asset quality, though weaker than that of larger peers, and high concentration risk.”