Sovereign domestic Sukuk issuance is playing a major role in Saudi Arabia’s fund-raising strategy to meet shortfalls in its 2020 budget allocations precipitated by the fallout from the twin pandemics currently ravaging the global economy, the coronavirus (COVID-19) and the catastrophic collapse in crude oil prices.
The benchmark Brent Crude Oil Futures slumped to US$16/barrel on 21 April 2020, regaining a little ground a few days later at US$20.40/barrel on 27 April. In mid-April the price of a barrel of West Texas Intermediate (WTI), the benchmark for US oil, fell as low as minus US$37.63/barrel, the first time it has gone below zero, because of a collapse in demand for May 2020 deliveries and a shortage of storage capacity. On 27 April it had rallied to US$14.00/barrel.
The National Debt Management Center (NDMC) of the Saudi Ministry of Finance (MoF) not surprisingly continued its proactive domestic sovereign Sukuk issuance in March and April 2020 when it issued its third and fourth consecutive monthly Sukuk offerings of 2020 raising a combined SR21,117.5 million (US$5,616.28 million) in just two months.
These comprised a three-tranche issuance totalling SR15,567 million (US$4,140.10 million) on 25 March consisting of:
- i) A 5-year first tranche of SR169.5 million (US$45.08 million) maturing on 23 March 2025 and priced at a profit rate of 2.17% per annum, attracting bids totalling SR2,743 million (US$729.51 million).
- ii) A 10-year second tranche of SR504 million (US$134.04 million) maturing on 23 March 2030 and priced at a profit rate of 2.69% per annum, attracting bids totalling SR8,346 million (US$2,219.65 million), and
iii) A 30-year third tranche of SR14,894 million (US$3,961.12 million) maturing on 23 March 2025 and priced at a profit rate of 3.68% per annum, attracting bids totalling SR14,894 million (US$3.961.12 million).
This was followed by a two-tranche issuance totalling SR5,550 million (US$1,476.04 million) on 22 April consisting of:
- i) A 7-year first tranche of SR1300 million (US$345.74 million) maturing on 27 January 2027 and priced at a profit rate of 2.47% per annum, attracting bids totalling SR2,523 million (US$671 million), and
- ii) A 15-year second tranche of SR4,250 million (US$1,130.30 million) maturing on 24 February 2035 and priced at a profit rate of 3.00% per annum, attracting bids totalling SR8,238 million, (US$2,190.93 million).
These issuances were once again partly driven by robust investor demand with total bids amounting to SR16,424 million (US$4,368.03 million) for the March auction and SR5,550 million (US$1,476.04 million) for the April auction.
The Saudi NDMCs has a multi-prong government-debt raising strategy comprising raising more funds from the financial markets including through increased domestic and international Sukuk issuances in addition to international conventional bonds and drawing on their sovereign wealth fund (SWF) assets. The Kingdom is by far the single most proactive sovereign domestic Sukuk issuer.
The MoF’s 2020 Calendar of Local Sukuk Issuances envisages 12 consecutive monthly issuances of Saudi-riyal denominated sovereign Sukuk and COVID-19 pandemic or not, this trend will continue. No other jurisdiction is committed to such a dedicated domestic Sukuk issuance regime. In the first four months of 2020, in the heat of the pandemic, according to MoF data, the NDMC issued consecutive monthly issuances, raising a total SR32,333 million (US$8,599.09 million) in the process.
The continued traction and upward growth trajectory of Saudi domestic Sukuk issuance, driven by robust investor demand and the emergence of tenors of up to 30 and 40 years, is underlined by the fact that the total funds raised in the first four months of 2020 is just under half of the total raised for the whole year in 2019.
The NDMC issued twelve consecutive monthly domestic Sukuk from January to December 2019 with an aggregate annual volume of SR69,839 million (US$18,610 million). This is a staggering SR23,054 million (US$6,150 million) year-on-year increase on 2018. The MoF also raised US$2,500 million through an international Sukuk in 2019, thus bringing the US dollar equivalent raised through Sukuk to US$21,110 million.
In addition, the Kingdom also issues conventional bonds as part of its diversified fund-raising strategy. On 16 April, the Kingdom issued a US$7,000 million conventional bond under its Global Medium-Term Note Programme – its seventh international bond to date and its second one this year following a US$5,000 million three-tranche multi-tenor offering in January.
The April issuance was more than 7 times oversubscribed, with the order book reaching over $54bn comprising three tranches – a 5-year $2.5bn tranche maturing in 2025 priced at 260 basis points (bps) over US treasuries, a 10-year $1.5bn tranche maturing 2030 priced at 270 bps over US treasuries, and a 40-year $3 billion tranche maturing in 2060 carrying an interest rate of 4.55% per annum.
This bond offering had for the first time a tranche with a 40-year tenor and one of the March domestic Sukuk tranches is for 30 years. Longer maturities (for both bonds and Sukuk) according to the NDMC “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.”
Saudi Sovereign Domestic Sukuk Issuance January-April 2020
Tranche 1 – SR715m
Tranche 2 – SR6,005m
27 January 2027
23 March 2030
Tranche 1 – SR508m
Tranche 2 – SR3,988m
27 January 2027
Tranche 1 – SR169.5m Tranche 2 – SR504m Tranche 3 – SR14,894m
23 March 2025
23 March 2030
30 March 2050
Tranche 1 – SR1,300m
Tranche 2 – SR4,250m
27 January 2027
Total Four Months 2020
10.01 years average
2.737% pa average
Source: Compiled by Mushtak Parker from Data of National Debt Management Center, Saudi Ministry of Finance April 2020
All the Kingdom’s sovereign domestic Sukuk issuances come under the unlimited Saudi Arabian Government Saudi Riyal (SR)-denominated Sukuk Programme, established on 20 July 2017 by the Ministry “to issue and offer, at its discretion, Sukuk in multiple issuances to investors, pursuant to the Royal Decree approving the National Budget.”
The Programme, structured and lead arranged by Alinma Bank, according to the MoF, also comes as part of the DMO’s role in securing Saudi Arabia’s debt financing needs with the best financing costs and would contribute to the development of the Saudi Sukuk and Islamic Capital Market.
In mid-April, Saudi Minister of Finance Mohammed Abdullah Aljadaan participated in the IMF’s virtual International Monetary and Financial Committee meeting discussing broadly the current global economic crisis and the impact of COVID-19. Aljadaan informed the Committee that “Saudi Arabia faces this global crisis from a position of strength given its strong balance sheet, with ample reserve buffers and relatively low government debt.” He urged the Fund “to employ well-targeted fiscal and monetary measures to create conditions for a speedy economic recovery and that fiscal measures should be targeted, time bound, and transparent to contain fiscal risks and debt vulnerabilities.”
A fortnight earlier the Saudi Minister of Finance launching Riyadh’s SR120 billion (US$31.91 billion) COVID-19 Mitigation Package tried to re-assure “that the government has considerable ability to diversify sources of financing between public debt and government reserves to adequately tackle the emerging challenges. This allows positive intervention in the economy in the right way and at the right time, while limiting the impact on the government’s goals in maintaining fiscal sustainability and economic development in the medium and long term. Some budget appropriations will be reviewed and reallocated to the sectors most in need. An emergency budget was also introduced to cover any costs that may arise during the developments of this global crisis.”
Similarly, Fahad Al-Saif, Chief Executive Officer of the NDMC had a virtual meeting with investors just prior to the Kingdom’s US$7 billion bond offering, re-assuring investors from 20 countries in Europe, North America, Asia and the Middle East about the resilience of the Saudi economy and its finances, and how the NDMC has adjusted its financing strategy to adapt to the global changes.
Saudi Arabia in reality is way ahead in tapping the domestic sovereign Sukuk market, given that it has a well-established issuance infrastructure complete with a government policy framework under its Fiscal Balance Programme and Financial Sector Development Programme, whose objectives inter alia is to add to a diversified public debt fund raising strategy and to the development of the Saudi Sukuk and Islamic Capital Market.
The Sukuk market like any other debt market is subject to the vagaries and caveats besetting the global economy and financial system – currently the impact of COVID-19 and low oil prices. “After witnessing strong market activity during the first two months of 2020,” says Bashar Al-Natoor, Global Head of Islamic Finance at Fitch Ratings, “the coronavirus pandemic has triggered major uncertainties in markets in general, putting new international sukuk issuance almost at a standstill in March 2020. The unprecedented combination of challenges includes health issues, reduced oil revenue, economic disruption, severe financial market dislocation, and changes in liquidity and investor sentiment.”
However, uncertainty, he adds, could lead to more pressure in financing that could lead to more issuance of Sukuk and bonds, albeit that Treasuries would also explore other fund-raising options. However, “if the liquidity is going to be there and confidence in the region can be translated into more issuances, they will come at a higher cost of finance. It is not business as usual. The prospects for Sukuk in the medium-term continues to be a growth story,” he maintains.
As far as local currency issuances, Saudi Arabia has a structural and competitive advantage. “The Kingdom,” explains Al-Natoor, “has the benefit of its ability to issue local-currency Sukuk due to its established domestic debt markets, in contrast to most other GCC jurisdictions that lack local-market depth.”