Saudi Arabia Returns to International Market With $2.5bn Sukuk Consolidated by a Tenth Consecutive SR7.265 billion Domestic Issuance as October Volume Tops $4.44bn

True to the earlier announcement by Dr Fahd Al-Saif, Director General of the Debt Management Office (DMO) of the Saudi Ministry of Finance (MoF), that the Kingdom would issue a Sukuk in the international market before the end of 2019, the DMO continued its proactive on-going monthly sovereign Sukuk issuance – this time two issuances comprising its third US dollar Sukuk offering, on 23 October 2019, and its regular monthly Saudi riyal issuance on the preceding day.

Investors both domestic and international, already awaiting the terms of the initial public offering (IPO) of Saudi Aramco, the Kingdom’s state-owned oil company and the largest crude oil exporter in the world, offered strong support for these additional investment opportunities, through subscription to this latest 10-year US$2.5 billion Sukuk issuance and the domestic SR7.265 billion (US$1.94 billion) sovereign Sukuk issuance. This brings the total Sukuk issuance of the DMO in October 2019 alone to US$4.44 billion.

The US dollar Hybrid Mudaraba/Murabaha Sukuk, according to the DMO, “was 5 times oversubscribed with total orders amounting to more than US$13 billion, reflecting the strength and robustness of the Saudi economy. Priced at the lowest yield issued by the Kingdom for 10-year securities, the level of investor demand demonstrates that the Kingdom represents the region’s safe haven for fixed income investors.”

The investor over-subscription came despite the action of Fitch Ratings, which downgraded the Kingdom’s sovereign rating to A (from A+) with a stable outlook in September 2019, albeit Moody’s Ratings Services made no changes to its rating of Saudi Arabia, which remained at A1 with a stable outlook. 

The Sukuk issuance was arranged by J.P. Morgan, Standard Chartered Bank and Bank Al Jazira Capital, following their appointment by the DMO to arrange a series of investor meetings and to act as dealers for the transaction. This issuance came under the unlimited International Sukuk Issuance Programme launched by the DMO in April 2017 as a part of the its role in “securing Saudi Arabia’s financing needs with best financing costs.  The Programme will also contribute to the fulfilment of the objectives of the Ministry’s Fiscal Balance Programme and to the development of the Saudi Sukuk and Islamic Capital Market.” 

The Sukuk was issued through a special purpose vehicle, KSA Sukuk Limited, and priced at a coupon rate of 2.969% per annum paid bi-annually, which is equivalent to a profit rate of 127 basis points over MS (mid-swaps). That is around 20 basis points below the level at which the bonds were marketed on Tuesday 22 October, a sign that hefty demand allowed the kingdom to tighten the pricing. The Sukuk certificates are listed on the London Stock Exchange.

The DMO last issued a Sukuk in the international market in September 2018 when it raised US$2 billion through a Hybrid Mudaraba/Murabaha Sukuk offering. That issuance was priced at a final spread of MS plus 127 basis points, which is equivalent to a yield of 4.3 per cent per annum.

The Kingdom’s debut international Sukuk issuance in April 2017 totalled US$9 billion comprising two tranches of US$4.5 billion each, which attracted an order book of a record US$33 billion. The 5-year US$4.5 billion tranche was priced at a profit rate of 2.894% per annum; and the 10-year US$4.5 billion tranche carried a profit rate of 3.628% per annum.

The three issuances bring the total value of the Kingdom’s international Sukuk since April 2017 to US$13.5 billion – the largest Sukuk volume by any sovereign issuer in the world.

This demand dynamic was similarly reflected in the subscription to the SR7.265 billion domestic issue. The issuance, which came under the Saudi Arabian Government SR-denominated Sukuk Programme, comprised four tranches:

i) A 6-Year first tranche of SR1.130 billion (US$300 million).

ii) An 11-Year second tranche of SR654 million (US$174.39 million).

iii) A 15-Year third tranche of SR362 million (US$96.53 million), attracting an oversubscribed order book of SR9.471 billion (US$2.53 billion); and

iv) A 30-Year fourth tranche of SR5.119 billion (US$1.36 billion), attracting an oversubscribed order book of SR20.615 billion (US$5.50 billion).

It is evident that domestic Saudi institutional investors in Sukuk prefer longer tenor issuances. Hence the combined SR30.086 billion (US$8.03 billion) oversubscription for the third and fourth tranches, whose final allocation totalled SR5.481 billion (US$1.46 billion).

The crucial difference between the international and domestic Sukuk issuances is in the tenor spectrum. The international transaction has a tenor of 10 years, whereas the domestic issuance has tranches with four tenors comprising 6, 11,15 and 30 years, of which the largest tranche by far was for the 30-year offering.

Another factor that is driving Saudi Arabian government bond and Sukuk issuance is that the Kingdom is now expected to take longer than the projected 2023 to balance its budget, which means that the DMO, according to local bankers, will access more financing from the domestic and international markets from bond/Sukuk issuances.

The DMO maintains that the Sukuk issuances will be valuable for long-term financing pricing in the Kingdom and that it will support infrastructure projects, as well as public and private sector debt issuances. As such, the 30-year issuance is expected to be a reference point to price mortgage and savings products by having it as a risk-free point on which price models are based on, and will also provide new investment products for the local market creating a new investor base such as pension funds, endowments, and insurance companies.

However, the crucial challenge remains unlocking the liquidity in Sukuk issuances especially by convincing investors holding on to the certificates to trade them on the domestic trading platform of the Saudi Stock Exchange (Tadawul) to start with.

In his pre-2020 budget statement on 31 October 2019, Mohammed Al-Jadaan, Saudi Minister of Finance, stressed that the joining of Tadawul to several global emerging markets indices “is expected to reap many economic and financial benefits, including increasing the efficiency and depth of the financial market, increasing the role of institutional investment, as well as improving the market liquidity through the flow of foreign investments, which has seen significant growth during the first half of this year compared to the same period last year.”

This October’s foray into the market is the tenth consecutive monthly domestic Sukuk issued by the DMO in 2019, bringing the total domestic sovereign Sukuk issued from January to November 2019 to SR63.325 billion (US$16.89 billion). 

All the Saudi Riyal Sukuk issuances are now listed on the Saudi Stock Exchange (Tadawul) for trading, with the hope this will develop into a robust secondary market especially for domestic issuances.

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