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Saudi DMO Maintains Domestic Sovereign Sukuk Issuance Momentum with Eighth Consecutive Offering as 2019 Offerings to Date Reach US$13 billion in a Changing Issuance Architecture

The Debt Management Office (DMO) of the Saudi Ministry of Finance, continued its proactive on-going monthly domestic sovereign Sukuk issuance in August 2019 with a three-tranche riyal-denominated offering totaling SR2.261 billion (US$610 million).

This follows the DMO’s SR5.216 billion (US$1.39 billion) Sukuk issuance and the Kingdom’s maiden €3 billion (SR12.7 billion) Euro-denominated and fifth international bond issuance under its Global Medium-Term Note Programme in July 2019. 

This latest SR2.261 billion August domestic Sukuk, issued under the Saudi Arabian Government’s unlimited SR-denominated Sukuk Programme, comprised three tranches:

  1. A first tranche of SR1.415 billion, (US$380 million) with a 5-year tenor and maturing in 2024. Subscriptions for this tranche totaled SR4.183 billion (US$1.13 billion).
  2. A second tranche of SR258 million (US$69.45 million) with a 9-year tenor and maturing in 2028. The second tranche was oversubscribed to the tune of SR2.628 billion (US$710 million).
  3. A third tranche of SR588 million (US$158.7 million) with a 15-year tenor and maturing in 2034. The third tranche was oversubscribed to the tune of SR9.109 billion (US$2.45 billion).

Three factors are driving Saudi Arabian government bond and Sukuk issuance. 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 Director General of the DMO Dr Fahd Al-Saif has already confirmed that the Kingdom plans to tap the international market with a Sukuk issuance of up to US$5 billion before the end of 2019.

The DMO is also trying to hone the pricing for Saudi sovereign issuances through building up a yield curve for longer tenor issuances of up to 30 years. Whilst longer tenors are an increasing feature of Saudi government debt issuance – both bonds and Sukuk – in its regular monthly domestic sovereign Sukuk offerings the 15-year tenor has now emerged as a standard maturity, which according to the DMO “will be valuable for long-term financing pricing in the Kingdom  [that].. will support infrastructure projects, as well as public and private sector debt issuances.”

Saudi banking sources also stress that the currency diversification strategy will not be confined to bond issuances only but is highly likely to include Sukuk offerings. As such the Kingdom is likely to issue Euro Sukuk in addition to US dollar denominated Sukuk.

This latest August foray into the market is the eighth consecutive monthly domestic Sukuk issued by the DMO thus far in 2019, bringing the total domestic sovereign Sukuk issued from January to August 2019 to SR47.226 billion (US$12.71 billion). 

All these achievements, according to the DMO, are also in line with the Kingdom’s Financial Sector Development Programme to enable financial institutions to support private sector growth and meet the objectives of Saudi Arabia Vision 2030. 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. 

Tadawul started to apply the amendment of the par value of the domestic sovereign debt instruments (bonds/Sukuk) issued by the Saudi government from SR1 million (US$266,640) to SR1,000 without changing the size of the issuance.

This includes 29 issuances of investment instruments issued to finance the budget. It is estimated that the size of the bond and Sukuk market currently stand at about SR292 billion, representing 66 issues, including five issues for the private sector and the rest for the government.

The Capital Market Authority (CMA), Tadawul and the DMO unveiled a number of enhancements to the fees and commissions’ structure of the Sukuk and Bonds Market in April 2019 in a joint effort to further develop the capital market.

Fahad Al Saif, Head of the DMO, said: “Enhancing the fees will have a significant positive impact on Sukuk and Bonds market and encourage Sukuk and bonds issuance and trading in Governmental issued Sukuk and activate its secondary market.”

In addition, The Securities Depository Center Company (Edaa) introduced in August the “Paying Agent” service, as an optional service for listed companies and funds.

Edaa aims to consolidate and streamline procedures related to the distribution of cash entitlements in the market, where Edaa will undertake distributions of cash entitlements to eligible shareholders on behalf of issuers through market members, thus ensuring the prompt transfer of cash entitlements and a reduction of costs on the issuers.

Similarly, Tadawul is also encouraged by the full inclusion of Saudi Arabia in the MSCI Emerging Market Index.

According to Khalid Al Hussan, Chief Executive Officer of Tadawul, “full inclusion in the MSCI Emerging Market Index represents an important milestone in advancing the Saudi capital market and further opening Tadawul to international investors, in accordance with the goals of the Financial Sector Development Program (FSDP) and Vision 2030.”

“Execution of index inclusion has been smooth and flawless, reflecting the success of the many market enhancements implemented by Tadawul to strengthen market infrastructure and align its regulatory and market frameworks with international best practices. At the same time, we are seeing significant investment inflows from foreign institutional investors, further supporting liquidity in what is already one of the most liquid emerging markets in the world, and expanding and diversifying opportunities for issuers and investors alike,” he added.

Tadawul in August also launched the Disclosure Professional Certificate for issuers of securities and investment funds in the capital market, in an effort to enhance quality of disclosures in accordance to Listing Rules and Regulations related to issuers and investment funds disclosures, and to improve transparency and elevate the required skills for disclosure officers to deliver added value to issuers and investors.

This certificate will be mandatory on all liaison officers of publicly listed securities and mutual funds effective on 01/01/2021.

In a further development, the Saudi Ministry of Finance issued a warning in August 2019 against dealing or investing in virtual currencies, including cryptocurrencies, as they are not recognized by legal entities in the Kingdom, are outside the scope of the regulatory framework and are not traded by financial institutions locally. Such crypto currencies have been associated with fraudulent activities and attract suspicion of use in illegal and illegitimate financial activities in addition to their high-investment risks related to frequent price fluctuations.

The Ministry said in a statement: “Virtual currencies have appeared claiming their relationship to financing of projects, activities or investment in the Kingdom of Saudi Arabia and using the name of the national currency the Saudi Riyal, or the Kingdom’s emblem (two crossed swords with a palm tree) for misleading marketing of its activities such as (Crypto Riyal) or other virtual currencies. The Ministry warns that any use of the Kingdom of Saudi Arabia, national currency, or emblem by any entity for virtual or digital currencies marketing will be subject to legal actions by the competent authorities in the Kingdom.”

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