SABB Issues SAR5bn Tier II Sukuk as Kingdom’s Independent Securities Clearing Centre Company (Muqassa) Gears to Start Operations at end August 2020

The Saudi British Bank (SABB) is the latest Saudi bank to raise funds from the market through a Sukuk issuance. SABB, in a disclosure to the Saudi Stock Exchange (Tadawul), confirmed that it issued a SAR5 billion (US$1.33 billion) Basle III compliant Tier II SAR denominated Sukuk on 23 July 2020 and distributed by way of private placement to sophisticated investors resident in the Kingdom.

The Sukuk, which has a tenor of 10 years and matures on 22 July 2030 and which has a callable option on 22 July 2025, subject to market conditions, was priced at 6 Months SAIBOR + 195 basis points. The Sukuk, for which HSBC Saudi Arabia was the sole book runner and lead manager, was issued pursuant to the Bank’s local currency Sukuk Programme – first Sukuk issued under the Programme.

The Board of Directors of SABB approved on 8 June 2020 the updating and amendment of the Bank’s International US Dollar Sukuk Issuance Programme to US$5,000 million and the establishment of a SAR5,000 million Local SAR Sukuk Issuance Programme.

The objective is to “issue and offer senior and/or subordinated Sukuk including the issuance of Tier II capital-eligible sukuk under each respective programme in one or more tranches or through one issuance or a series of issuances by way of private placement or public offering inside or outside the Kingdom of Saudi Arabia denominated in U.S. Dollars or any other currencies (in respect of the International Programme) or Saudi Riyals (in respect of the Local Programme).”

The aggregate amounts for each programme, said the Board in a disclosure to Tadawul, would not exceed the overall size of each respective programme. Any issuances would be subject to the market conditions and in line with the SABB’s financial and strategic needs as deemed appropriate by the Bank. The proceeds from any tranche issuances under both programmes would be used to “fulfil the Bank’s financial and strategic needs and for balance sheet and business development purposes.”

The SABB Sukuk issuance follows the domestic SAR4,200 million (US$1,120 million) Additional Tier 1 Perpetual Sukuk issued by The National Commercial Bank (NCB) in June 2020 and too distributed by way of a private placement. That issuance was priced at a profit rate of 4.25% per annum. Being a perpetual issuance there is no maturity to the transaction.

But according to NCB, the Sukuk may be redeemed early due to a capital event, tax event or at the option of the Bank as described in the terms and conditions of the Sukuk. The proceeds from the Sukuk issuance, too will be used to strengthen the Bank’s capital base in accordance with the Basel III framework.

Both transactions come at a time of the imminent launch of the independent Securities Clearing Centre Company (Muqassa), which is scheduled to start operations on 30 August 2020. The establishment of Muqassa and its licensing earlier this year is one of the Financial Sector Development Programme (FSDP) initiatives, under the Kingdom Vision 2030, that also supports the commencement of derivatives trading on Tadawul. The clearing service will start with the Exchange Traded Derivatives, clearing MT30 Index Futures Contract, and other markets to follow at a later stage.

SABB joined Muqassa together with seven other Saudi financial institutions in July as a Member to perform clearing activities in the Saudi Stock Exchange. There are three types of membership – General Clearing Member (GMC) comprising The National Commercial Bank, The Saudi British Bank and Samba Financial Group; Direct Clearing Member (DCM) comprising Saudi Fransi Capital, HSBC Saudi Arabia and Derayah Financial; and Non-Clearing Member (NCB) comprising NCB Capital Samba Capital.

Muqassa aims to further support the growth of the Saudi capital market by improving the post-trade infrastructure, contribute to reducing counterparty risk, increase operational efficiency, and enable the introduction of new financial products and service offerings. Bankers stress that the independent clearing house (Muqassa) will strengthen Saudi capital market infrastructure and increase operational efficiency, albeit the process may take some time to settle down.

“The activation of an independent clearinghouse,” maintains Wael Abdullah Al Hazzani, CEO of Muqassa, “is part of the Financial Sector Development Programme in line with Vision 2030 goals to develop a diversified and effective financial sector in the Kingdom. We believe that Muqassa will enhance the current financial market infrastructure by applying advanced risk management practices and transparent default management processes.”

The launch of Muqassa’s operations is facilitated by the collaborative efforts undertaken by Tadawul, Muqassa, the Capital Market Authority (CMA), and the Saudi Arabian Monitory Authority (SAMA) to ensure the required laws and regulations for the activation of the clearinghouse is in place. According to Muqassa, the recently amended Capital Market Law, the Securities Central Counterparties Regulations, the Securities Clearing Centre Rules and Procedures will aid in regulating the securities clearing centre and activating its role in performing its duties and obligations within the capital market infrastructure institutions.

The CMA in fact approved the Securities Clearing Centre Rules; Clearing Procedures and a Glossary of Defined Terms Used in the Exchange Rules in March this year following an extensive public consultation.

The Rules and Procedures aim to enable Muqassa’s role as a Central Counterparty (CCP) clearing house in the Saudi Capital Market, and to regulate the clearing members’ responsibilities. The aim is not only to enhance the relationship, rights and obligations between the clients and the clearing members, but also to contribute to the development of clearing services in accordance with international practices, to enhance market stability, to reduce the post trade risks and to enable the introduction of new financial instruments and services.

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