Indonesia issued its debut sukuk deal late last week, pricing a $650 million five-year deal early Friday morning Hong Kong time. The issue reopens a market that has been closed since Bahrain sold a $350 million sukuk in March 2008.
It was a notable transaction in several ways. It was the largest sukuk, or Islamic bond, since Dubai Ports in June 2007; the first from a country outside the Gulf Cooperation Council (GCC) since Pakistan in 2005; and only the second Regulation S, Rule 144A registered sovereign sukuk since Malaysia in 2002.
The deal was completed within 36 hours of its announcement on Wednesday, after a long preparation that included worldwide roadshows in late February. It was priced at par with a semi-annual coupon of 8.80% and a maturity date of April 23, 2014. It was launched at a yield premium of 30bp over Indonesia's recent five-year conventional benchmark global notes. At the close of business in Asia on Friday, the sukuk was bid at 101.5.
The issue was an ijara sukuk, launched out of Perusahaan Penerbit SBSN Indonesia I (PPSI-I), a special purpose vehicle holding beneficial rights over 70 government buildings valued at $700 million.
The major credit rating agencies assigned the sovereign rating to the transaction. Moody's Investors Service scored it Ba3, Standard & Poor's BB-, and Fitch BB. In the case of Moody's and S&P, this is three notches below the Baa3 or BBB- rating needed to qualify as investment grade. The Fitch rating is two notches below investment grade.
S&P said in report on April 15 that the rating on the trust certificates of PPSI-I reflects the strength of the lease agreement, under which the sovereign as lessee is obliged to make all payments needed to ensure that the issuer has funds sufficient to pay the certificate holders.
Ijara is a sale lease-back arrangement, whereby an asset is bought by a bank (or investor) and then rented to a client for a fee that includes the purchase price and the profit earned during the rental period. The ijara principle is increasingly preferred over alternative types of structure, such as mudaraba and musharaka, which contain profit-sharing components and hence greater exposure to market turbulence. Ijara sukuk are relatively straightforward to create and are less risky, plus they are more widely endorsed by Shar'iah scholars. S&P estimates that ijara structures made up more than 45% of sukuk issued last year.
On April 15, the chief executive of Standard Chartered's Islamic unit, Saadiq Afaq Khan, told a Reuters Islamic finance conference in Dubai that he expects sukuk issuance to reach at least $10 billion this year, following around $15 billion of issuance in 2008. He pointed out that assets in the Islamic finance industry are now worth between $750 billion and $900 billion, and are growing at an annual rate of 15%-20%.
Nevertheless, Islamic finance represents just 1% of global assets; yet worldwide there are around 1.4 billion Muslims, so the sector has considerable room for expansion.
Barclays Capital, HSBC and Standard Chartered were joint lead managers for the Indonesia deal, which was about seven times subscribed.
The transaction served to diversify Indonesia's investor base into Islamic and Middle Eastern accounts, which took 30% of the issue, say bankers familiar with the allocation. Investors in Indonesia bought 8% and those in other Asian countries took 32%, while accounts in the US and Europe bought 19% and 11% respectively.
In terms of investor type: 45% was placed with fund management firms, 37% with banks, 14% with retail and 4% with insurance companies and pension funds. According to the banking sources, there was broad participation from conventional accounts, with more than 230 showing solid interest; the US book alone was worth over $1 billion.
Moody's reaffirmed Indonesia's sovereign rating in a report released on Wednesday last week, arguing that Indonesia's resilience to the global crisis is supported by a large, domestic demand-driven economy, lower exposure to international trade and capital flows than its East Asian neighbours, and its "improving institutional capabilities".
Furthermore, it said that an "appropriate mix of fiscal and monetary policies" will likely be sustained during the country's current legislature elections and the presidential election in June, while its vulnerability to outside shocks should be limited by a declining trend in external indebtedness and by adequate foreign exchange reserves.
