South Africa’s sophomore Sukuk in the pipeline

South Africa is currently preparing to issue its second sovereign Sukuk facility, MARC ROUSSOT reveals. It is understood that the impending offering is likely to be denominated in the local currency as the treasury intends to use the offering to develop the domestic market.

Looking to attract long-term investors, the planned paper would build on the success of the government’s inaugural US$500 million Sukuk Ijarah printed in 2014. The details of the forthcoming deal still need to be ironed out. Decisions have yet to be taken on the timeline, the size, the underlying asset and the tenor.

“Sukuk have predominantly been short five to seven years but [we] will assess closer to the time and upon further engagements with more Sukuk investors we can determine the tenor,” the National Treasury told IFN.

As for the structure, tax considerations and other requirements will be assessed prior to any decision, but the treasury is leaning more toward an asset-light instrument if it will yield some benefits in tradability and issuance.

As the rainbow nation is wrestling with a depressed economy characterized by a relatively weak South African rand, a whopping 27.6% unemployment rate and a looming recession following a 3.2% contraction of the economy in the first quarter of the year, the treasury wants to be sure that market conditions are conducive prior to make further announcements.

“If we feel the pricing is extremely unfavorable, we could reconsider the issuance time,” the treasury shared.

While the current economic and financial situation is certainly not ideal, South Africa’s potential domestic offering is good news for local Islamic banks and windows such as First National Bank, Standard Bank, Absa Bank and Al Baraka which are in dire need of Islamic assets to invest in for liquidity management purpose.

The deal would also be a new step in the construction of Africa’s Islamic capital market, which South Africa was the first to tap five years ago. Its US$500 million Sukuk maturing on the 24th June 2020 was more than four times oversubscribed with an order book of US$2.2 billion. Listed on the Luxembourg Stock Exchange, the paper is carrying a 3.9% yield. The lead arrangers for the transaction were BNP Paribas, KFH Investment and Standard Bank Group.

In total, nine African sovereigns, namely, Nigeria, Sudan, Gambia, Morocco, Mali, Togo, Senegal, Mauritania and South Africa have issued Shariah securities in the past. More are to come with Algeria, Kenya and Egypt having Sukuk plans.

This article first appeared in IFN Volume 16 Issue 28 on the 11th of July 2019

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