DIFC Investments (DIFCI), the developer and operator of the Dubai International Financial Center (DIFC), successfully closed its standalone US$700 million Sukuk issuance on the 12th November 2014. The well-received paper garnered strong investor demand, with US$3 billion worth of orders with particular demand from regional banks and Asian fund managers. Speaking to Rajesh Pareek, the chief financial officer of the DIFC, NABILAH ANNUAR provides a detailed breakdown of the Sukuk transaction.
Priced at a coupon rate of 4.32%, the Sukuk issuance was a hybrid structured instrument incorporating the principles of Ijarah and Wakalah. According to Pareek, this particular structure was selected because the majority of assets were already leased to third parties and the issuer intended to limit the use of land affording maximum flexibility to implement future developments. “The Sukuk proceeds were used to purchase a portfolio of certain real estate assets within the DIFC. These assets were either already leased to external parties (where the related businesses were Shariah compliant) or were leased to DIFCI under an Ijarah arrangement,” he explained. As servicing agent, DIFCI collects the aggregate lease returns generated from the portfolio to fund the periodic distribution amounts due under the Sukuk. At maturity or upon a dissolution event, DIFCI will purchase the portfolio of real estate assets at an exercise price equivalent to the redemption amount.
One of the challenges faced in the process of the Sukuk issuance was attaining an investment grade credit rating of ‘BBB- (stable)’, which necessitated the company to employ a credit repositioning strategy with S&P. In 2012, DIFCI’s rating of ‘B+’ was withdrawn by the rating agency. DIFCI subsequently undertook a major transformation in its business by focusing on its core business (i.e. the ownership, operation and development of its properties) and moved away from ancillary businesses which included investments in non-real estate assets outside the DIFC. Pareek elucidated that the DIFCI re-engaged S&P and appropriately demonstrated its strengthened capital structure with limited real estate development risk and highlighted the diversified & stable rental cash flows. This in turn established the stable business model of the company and its competitive advantages, resulting in the standalone rating improvement from ‘ccc-’ at the time of withdrawal, to the current ‘bb-’. Additionally, DIFCI successfully communicated DIFC’s importance to the Government of Dubai, resulting in a three-notch uplift from the standalone rating.
The deal signifies DIFCI’s return to the international debt capital markets after the issuance of its US$1.25 billion of Sukuk certificates in 2007. The issuance is believed to have effectively re-opened the debt capital markets for regional corporate issuers as it is the first US dollar-denominated benchmark issuance by a regional corporate entity since July 2014. Pareek further highlighted: “Our ability to execute this Sukuk issuance after the bout of market volatility is a testament to the confidence that investors have in the DIFCI business model. Since the pricing of our transaction, a few transactions were announced, and we would expect a few more to be executed before the year end. Our ability to raise long term financing at attractive rates is bound to provide an impetus to other issuers from the region.” Demonstrating this success, the Sukuk issuance was priced inside higher-rated Dubai credits, namely Emaar Malls (‘Baa2’ by Moody’s and ‘BBB-’ by S&P) and Majid Al Futtaim (‘BBB’ by Fitch and S&P).
US$700 million
12th November 2014
|
|
Issuer | DIFC Sukuk |
Obligor | DIFC Investments |
Issuance price | 100% |
Purpose of issuance | Refinancing and general corporate purposes |
Trustee | DIFC Investments |
Tenor | 10 years |
Coupon rate | 4.33% |
Payment | Semi annual |
Currency | US dollar |
Maturity date | 12th November 2024 |
Lead managers, principal advisors and bookrunners | Dubai Islamic Bank, Emirates NBD Capital, Noor Bank, Standard Chartered Bank |
Governing law | English and DIFC Law |
Legal advisors |
To the bookrunners: Linklaters
To the obligor: Allen & Overy
|
Listing | NASDAQ Dubai |
Underlying assets | Real estate leases and assets in the DIFC |
Rating | ‘BBB-’ (Stable) by S&P |
Structure | Wakalah / Ijarah hybrid structure |
Investor breakdown |
By geography:
UAE: 41%
Middle East (ex-UAE): 25%
Europe: 14%
Asia: 19%
Other: 1%
By type:
Banks: 39%
Fund managers: 32%
Supranationals/Central Banks: 20%
Insurance: 5%
Private banks : 4%
|
Face value/minimum investment | US$200,000 and integral multiples of US$1,000 in excess thereof |