South African sukuk: A funding chapter for Africa

This is implicit in the geographic distribution of the investors. In July, the National Treasury issued dual-currency and dual tranche conventional bonds – a 500m euro-denominated bond issue with a tenor of 12 years at 225 basis points above the euro mid-swap rate, and a $1bn bond issue with a tenor of 30 years at 220 basis points above similarly-dated US Treasuries.

The dual tranche had an investor distribution comprising 62% in the US, 19% in the UK, 17% in Europe and 2% from the rest of the world. In contrast, the sukuk transaction investor distribution consisted of 52% from the Middle East, 18% from the UK, 9% each from Europe and Asia, 8% from the US Offshore, 3% from Africa and 1% from the rest of the world.

This means that at a stroke of a mere single sukuk issuance, South Africa has opened several substantial new non-traditional investor bases in the Middle East, Malaysia, Brunei, Turkey and Hong Kong from where it can raise funds through the international capital markets. This, stress bankers, augurs well for future sukuk originations out of South Africa.

David Munro, CEO for CIB, Standard Bank, said: “This deal is evidence that Africa is at the forefront of financial innovation. The sukuk from the National Treasury is a key milestone not only for South Africa but it sets a precedent for similar deals from the rest of sub-Saharan Africa. We see Islamic finance as a growth opportunity for Africa and are committed to helping our clients access funding from Islamic investors.”
 
Sukuk opens up new sources of finance
For KFH Investment and Emad Al Monayea, the transaction is also a personal vindication. The bank, according to Al Monayea, was responsible for $1,004m of orders from the total $2.24bn.

More importantly, more than half, $258m – of the allocated investor orders was through KFH Investment. The fact that the Middle East, by far GCC investors, accounted for a whopping 52% of the subscription is an important new indicator that Gulf investors have a strong appetite for investment-grade sukuk issuances out of South Africa.

This augurs well for future issuances from South Africa’s state-owned companies in the international markets. Emad Al Monayea has already been in talks with utilities such as Eskom and the South African National Roads Agency Limited SOC Ltd (SANRAL), the two state-owned entities that have expressed a desire to tap the sukuk market to finance expansion and other balance sheet activities.

Nazir Allie, CEO of SANRAL, has confirmed that the agency has been looking at sukuk as an alternative way of raising financing, albeit its borrowing programme is heavily governed by the level of government budget allocations and its own revenue generation. The hurdle of the absence of a benchmark sovereign sukuk, however, is no longer relevant.

Governments all over the world finance their various budgets and programmes through tax and other revenues, and through borrowing from the domestic and international markets through the issuance of various financial papers, largely bonds of different types and tenors.

Both South Africa’s Minister of Finance, Nhlanhla Nene, and his predecessor, Pravin Gordhan, are proactive supporters of the introduction of alternative Islamic financial instruments in the South African market to access a new investor base, to promote financial inclusion, and to diversify the country’s sources of international financing.

According to the National Treasury, the South African government’s borrowing requirement is expected to amount to R162.9bn ($15.15bn) in 2013/14, increasing to $16.72bn in 2014/15 before declining to $14.12bn in 2016/17.

In addition, government will borrow $14.41bn over the medium term to finance debt due (loan redemptions). The borrowing requirement is financed through loans made in the domestic and global markets and by using surplus cash.