The Saudi Electricity Company (SEC), the largest electricity utility company in the Middle East & North Africa (MENA) region, successfully completed a US$1.3 dual tranche fixed rate Reg S Senior Unsecured International Green Sukuk issuance on 11 September 2020.
The Sukuk was issued under the company’s recently released Green Sukuk Framework (GSF), prepared in accordance with the International Capital Market Association (ICMA) Green Bond Principles and in alignment with EU taxonomy regulation environmental objectives regarding mitigating climate change. These are based on five pillars including Use of Proceeds, Process for Project Evaluation and Selection, Management of Proceeds, Reporting and External Review.
The issuance, which comprises two US$650 million tranches – one with a 5-year and the other with a 10-year tenor, marks a growing engagement of the Islamic capital market in the Green Finance agenda.
SEC, rated A- by Fitch (stable outlook), A- by S&P (stable outlook), and A2 by Moody’s (Negative outlook), mandated HSBC and MUFG as Green Structuring Advisors along with First Abu Dhabi Bank, HSBC, J.P. Morgan, MUFG and Standard Chartered Bank as Joint Lead Managers to arrange a series of fixed income investor calls in Asia, Europe and the Middle East commencing on 9 September 2020.
The issuance, which was done through the Cayman Islands registered special purpose vehicle, Saudi Electricity Global Sukuk Company 5, attracted an overwhelming response from investors. “In a strongly attended virtual roadshow which included calls with key anchor investors from Hong Kong, Singapore, UAE and the UK as well as a global investor conference call that attracted about 70 international institutional investors, SEC presented its credit story to investors, and highlighted its ESG strategy ambitions and credentials of its contemplated Green Sukuk,” said the utility in a disclosure to the Saudi Stock Exchange (Tadawul).
Not surprisingly, Fahad Al Sudairi, SEC President & Chief Executive Officer, is “delighted with the high interest from the international investors in SEC’s credit story. This Sukuk issuance comes in line with SEC’s strategy to diversify its funding sources, broaden its investor base in the international markets and supports its aims to seek innovative and sustainable finance for our green project portfolio.”
The launch of the Green Sukuk issuance was announced on 10 September and SEC completed the transaction in intraday execution on the same day with an almost 4 times oversubscription. The order book reached in excess of US$5.3 billion and attracted a combination of more than 267 of high-quality institutional investors and dedicated green accounts from 22 countries in Asia, Europe and the Middle East. This response, added SEC, reaffirmed continued confidence by global investors in the Saudi economy and corporates.
The US$1.3bn transaction marked several ‘firsts’ – it is the first Green Sukuk issuance from Saudi Arabia in the international markets; it is the largest of its kind from the MENA region in 2020; it is the first Saudi US dollar denominated Green Sukuk issuance; and it is also the cheapest ever issuance for SEC since it started to access the international market.
What was encouraging, according to SEC, is that despite a surfeit of debt offerings from emerging markets issuers and from the Middle East region, its Green Sukuk attracted considerable interest from socially responsible investors (SRI) and green investors along with typical conventional fixed income investors, “enabling the SEC transaction to build a high-quality and diversified order book that peaked at US$5.3 billion.”
This positioned the company to price the issuance inside its yield curve at Midswap (MS) +140 basis points (bps) (a negative 10 bps new issue premium) and MS + 170bps (a negative 15 bps new issue premium) for the 5 and 10-year tenors respectively. This also represented a spread of about 11 and 15 bps against the Kingdom of Saudi Arabia sovereign curve for those same tenors. As such, the coupon rate on the 5 and 10-year tranches were priced at a fixed rate of 1.74% per annum and 2.413% per annum respectively.
The Trust Certificates were assigned a rating of ‘A’ by Fitch Ratings in line with the company’s issuer default rating and its senior unsecured rating. The trust certificates are listed on the Irish Stock Exchange (Euronext Dublin).
SEC is perhaps the most proactive electricity utility accessing Islamic debt finance. It has regularly issued Sukuk since 2012 with its last foray into the market in October 2018 with a US$2 billion Sukuk comprising two tranches of US$800 million and US$1.2 billion Sukuk certificates issued through the Saudi Electricity Global Sukuk Company 4.
The company is also a regular user of Syndicated Murabaha facilities. In August 2020 a consortium of Saudi-based banks arranged a 7-year SAR9 billion Syndicated Murabaha facility for SEC, to be used for “general corporate purposes including capital expenditure.”
Proceeds from the Sukuk will finance and/or refinance in whole or in part green projects focused on procurement and installation of smart meters as well as construction and operation of infrastructure for connecting renewable energy sources to the grid, as per the provisions of SEC’s Green Sukuk Framework.
This framework was independently reviewed and assessed by an international second party opinion provided by ESG verifier, Vigeo Eiris (VE).
“Vigeo Eiris is of the opinion that Saudi Electricity Company’s Green Sukuk Framework is aligned with the four core components of the Green Bond Principles 2018. We express a Reasonable Assurance 4 (our highest level of assurance) on the Issuer’s commitments and on the contribution of the contemplated Sukuk to sustainability. We are of the opinion that the contemplated Sukuk are coherent with SEC’s strategic sustainability priorities and sector issues and contribute to achieving the Issuer’s sustainability commitments,” said VE.
The net proceeds of the Sukuk will exclusively finance or refinance, in part or in full, projects falling under two Green Project Categories namely, Energy Efficiency and Renewable Energy; contribute to one main environmental objective (climate change mitigation) to provide clear environmental benefits; and are likely to contribute to two of the United Nations’ Sustainable Development Goals (SDGs) – Goal 7 (Affordable and Clean Energy) and Goal 13 (Climate Action).
The SEC Green Sukuk follows the 5-year US$750 million Green Sukuk Wakala issued by Indonesia in June 2020, which was the third global Green Sukuk issued by Jakarta outside the retail Green Sukuk issued at end 2019.
Green bonds are a growing category of fixed-income securities and green Sukuk could widen the appeal of Sukuk beyond its traditional markets in Asia and the Middle East to include ethical investors in Western countries. However, Green Sukuk issuance has still a long way to go to catch up with Green bond issuance.
Indonesia is the world’s most proactive issuer of Green Sukuk, while Malaysia has pioneered corporate Green Sukuk with about six such issuances in the market to date pioneered by Chinese-backed entities such as Tadau Energy, Quantam Solar and Cypark Resources. In May last year Majid Al Futtaim (MAF), a leading shopping mall, communities, retail and leisure developer across the Middle East, Africa and Asia, successfully closed a debut US$600 million benchmark Green Sukuk.
Last November, the Islamic Development Bank (IsDB) also successfully priced its maiden Green Sukuk, raising EUR1 billion in 5-year Trust Certificates under its US$25 billion Trust Certificate Issuance Programme.