Bahrain Deal of the Year
Bahrain recently issued US$1 billion-worth of trust certificates in the global Sukuk market in a bid to plug its widening budget deficit, with response for the Regulation S facility outstripping its expectation amid a backdrop of falling commodity prices. NURUL ABD HALIM writes.
The issuance of sovereign Sukuk, pursuant to Regulation S and Rule 144A of the US Securities Act, has provided a boost to the Bahraini government’s efforts to buttress its public spending as the impact of lower oil prices has sent the Kingdom’s fiscal and economy roiling, which prompted global rating agencies to cut the sovereign’s ratings to junk status.
Executed simultaneously with a 12-year US$1 billion bond, the Islamic instrument has an edge over its conventional counterpart as pricing for the latter was more competitive at 5.62% compared to the former at 7%. It is also understood that both facilities witnessed oversubscriptions, with the Sukuk facility enjoying healthy distribution across various geographies.
“We were told that initial indications were that the government was expecting to issue a larger bond than Sukuk. However, they managed to raise US$1 billion from the bond issuance and also US$1 billion from the Sukuk, which would appear to indicate that the Sukuk [facility] was well received,” commented Gregory Man, a partner at Norton Rose Fulbright in the Dubai office, which also acted as the issuer’s legal advisor. Man also noted that the Bahraini government’s ability to raise funds through a combination of Sukuk and conventional bonds in benchmark sizes for both tranches amid depressed market conditions is unique as it is not seen in many sovereigns’ issuances.
It is also worth noting that this is the first time that the sovereign is issuing a global Sukuk instrument using a hybrid structure: a combination of Ijarah (headlease/sublease) and Murabahah structures. “The previous Sukuk structures utilized by the government involved only a headlease/sublease structure, but the incorporation of the Murabahah represented a structural development which allowed the government to effectively leverage their assets,” said Man.
Under the Ijarah structure, the issuer will use not less than 51% of the Sukuk proceeds to acquire a 100-year leasehold interest in one or more land parcels from the government and then lease the assets back to the latter for a lease term equal to the tenor of the Sukuk in exchange for a periodic rental payment. In respect of the Murabahah structure, the issuer will buy certain commodities from a supplier at a cost price of not more than 49% of the Sukuk proceeds, and subsequently spot sells to the government for a deferred price.
Summary of terms & conditions |
|
Issuer |
|
Obligor |
Kingdom of Bahrain, acting via the Ministry of Finance |
Size of issue |
US$1 billion |
Mode of issue |
Private placement |
Purpose |
General budgetary purposes |
Tenor |
Eight years |
Issuance price |
100% |
Profit rate |
5.62% |
Payment |
Semi-annually |
Currency |
US dollar |
Maturity date |
12th February 2024 |
Lead manager(s) |
Arab Banking Corporation, BNP Paribas, Credit Suisse Securities, JPMorgan Securities, Standard Chartered Bank |
Delegate and co-Sukuk agent |
Citibank, London branch |
Governing law |
English and Bahraini laws |
Legal advisor(s)/counsel |
To the issuer: |
To the arrangers: |
|
Listing |
|
Underlying assets |
Land parcels and Shariah compliant commodities |
Rating |
Fitch: ‘BB+’ with a stable outlook |
Structure |
|
Tradability |
Yes |
Shariah advisor(s) |
Shariah Supervisory Board of ABC Islamic Bank; Shariah Supervisory Committee of BNP Paribas; Shariah advisors of JPMorgan Securities; Shariah Supervisory Committee of Standard Chartered Bank; Sheikh Dr Mohamed Ali Elgari, Sheikh Nizam Yaquby and Sheikh Dr Walid Hady |
Face value/minimum investment |
US$200,000 and integral multiples of US$1,000 in excess thereof |