Renewable energy is fast becoming the primary source of the world’s power. The progress during the last decade is evident of the clear shift that the world is making toward renewable energy. To put things into perspective, installed renewable power capacity grew more than 200 GW in 2019 (mostly solar photovoltaics (PVs)), the largest increase ever. For the fifth year in a row, net additions of renewable power generation capacity clearly outpaced net installations of fossil fuel and nuclear power capacity combined globally. In most countries, producing electricity from wind and solar PVs is now more cost-effective than generating it from new coal-fired power plants. These cost declines have led to record-low bids in tendering processes, which became even more common during the year.
Review of 2020
Here are some of the notable deals in the renewable energy space which were concluded in last quarter of 2019 and early 2020 and then continued through 2020. Malaysia has been a very active player in Islamic finance-based renewable energy deals followed by Pakistan and the UAE. The following are some of the landmark deals which started off in 2019 and continued in 2020.
Cypark Ref’s Sukuk Murabahah (Malaysia)
Transaction |
Up to RM550 million (US$134.48 million)-worth of Sukuk under the Shariah principle of Murabahah (via a Tawarruq arrangement) based on Securities Commission Malaysia (SC)’s Sustainable and Responsible Investment (SRI) Sukuk framework to finance three 30 MWac solar PV projects, located at Terip Dam, Negeri Sembilan. |
Lead bank |
|
Tenor |
22 year(s) |
Project cost |
RM719 million (US$175.8 million) |
Finance structure (77:23) |
Equity: RM169 million (US$41.32 million) Sukuk: RM550 million |
Deal uniqueness and structure: An SRI Sukuk Murabahah program pursuant to which the issuer may from time to time issue SRI Sukuk Murabahah under the Shariah principle of Murabahah (via a Tawarruq arrangement) where the aggregate outstanding nominal value of such SRI Sukuk Murabahah shall not exceed RM550 million at any one time.
Majid Al Futtaim’s green Sukuk (UAE)
Transaction |
Majid Al Futtaim, an Emirati real estate and retail giant, has launched the Middle East’s first corporate green Sukuk on the NASDAQ Stock Exchange in Dubai valued at US$600 million issued under Majid Al Futtaim’s US$1.5 billion trust certificate issuance program. Proceeds from the green Islamic bond, the company said, will be used to finance and refinance its existing and future green projects, including green buildings, renewable energy, sustainable water management and energy efficiency |
Sukuk Amount |
US$600 million |
Tenor |
10 years |
Deal uniqueness and structure: The Sukuk issuance was more than six times oversubscribed with one-third of the investors coming from Asia. With the green Sukuk listing, the value of all debt instruments listed on NASDAQ Dubai by Majid Al Futtaim has reached US$2.4 billion. It was priced at 4.64% and will mature in May 2029. Both Fitch Ratings and S&P Global Ratings have assigned the Sukuk a ‘BBB’ rating.
Edra Solar’s Sukuk Murabahah (Malaysia)
Transaction |
Edra Solar has raised RM245 million (US$59.9 million)-worth of Sukuk Murabahah to fund its 50 MWac solar PV plant located at Kuala Ketil, Kedah Darul Aman, in Peninsular Malaysia (the Project). Edra Solar is a subsidiary of China General Nuclear Power Corp. |
Lead managers |
|
Project cost |
RM306 million (US$74.82 million) |
Financing structure (80:20) |
Equity: RM61 million (US$14.91 million) Sukuk: RM245 million |
Tenor |
Ranging between one year and 18 years |
Deal uniqueness and structure: The Sukuk issuance comprised eight tranches with tenors ranging between one year and 18 years. This is the first Sukuk issuance arranged under the ASEAN sustainability SRI framework and the first solar power project to tap the ringgit Sukuk market. The solar power plant has been rated ‘AA2’ (first in the category). The RM245 million Sukuk facility was successfully priced through the price discovery method.
Serba Dinamik Holdings’s Wakalah Bi Istithmar Sukuk (global financial institution)
Transaction |
Clifford Chance advised international energy services group Serba Dinamik Holdings (Serba Dinamik) on the international aspects of its US$300 million high-yield Sukuk. |
Lead bank |
|
Lead managers |
|
Financing amount |
US$300 million |
Deal uniqueness and structure: This is the first-ever high-yield rated Sukuk from Asia, and Serba Dinamik’s debut in the US dollar bond market. It achieved the lowest coupon for an inaugural high-yield rated issuer since 2017. The transaction combines a high-yield covenant package and credit structure with a Wakalah Bi Istithmar Sukuk and represents the first US dollar high-yield Sukuk offering in Asia Pacific.
IsDB’s green Sukuk Wakalah (global financial institution)
Transaction |
The IsDB successfully priced its first-ever green Sukuk amounting to EUR1 billion (US$1.19 billion) in five-year trust certificates. The proceeds shall be utilized to fund climate change and green projects in its 57 member countries. These include projects for renewable energy, clean transportation, energy efficiency, pollution prevention and control, environmentally sustainable management of natural living resources and land use and sustainable water and wastewater management. |
Green structuring agent |
|
Rating |
AAA |
Financing amount |
EUR1 billion |
Deal uniqueness and structure: This is the first-ever euro-denominated and the first-ever ‘AAA’-rated green Sukuk. The coupon is the lowest ever paid by the issuer. The Sukuk facility was priced at par with a profit rate of 0.04%, to be payable on an annual basis, making it the lowest-ever profit rate for a euro issuance by the bank. This is the IsDB’s third public issuance in 2019. The landmark issuance is the inaugural trade based on the bank’s recently created Sustainable Finance Framework and is also the first-ever ‘AAA’-rated green Sukuk in the global capital markets. The trust certificates will be listed on Euronext Dublin, NASDAQ Dubai and Bursa Malaysia (under the Exempt Regime).
Liberty Wind Power’s Islamic financing (Pakistan)
Transaction |
Liberty Wind Power 1 raised PKR4.8 billion (US$29.99 million) to finance its 50 MW wind power plant to be located at Jhimpir, Sindh, Pakistan. |
Lead bank |
|
Participants |
Bank of Punjab, Allied Islamic Bank |
Offshore financier |
CDC Group |
Facility |
i) SBP Islamic Refinance Scheme for Renewable Energy: PKR4.8 billion ii) Syndicated term finance facility (KIBOR-based): PKR4.8 billion |
Tenor |
i) SBP Refinance: 12 years (inclusive of a two-year grace period) ii) KIBOR-based STFF: 15 years (inclusive of a two-year grace period) |
LCY financing amount |
PKR4.8 billion |
Deal uniqueness and structure: The transaction is for one of the country’s multiple wind energy projects, which achieved financial close in 2019.
NASDA Green Energy’s Islamic financing (Pakistan)
Transaction |
NASDA Green Energy raised PKR4.7 billion (US$29.37 million) to finance its 50 MW wind power plant to be located at Jhimpir, Sindh, Pakistan. |
Lead bank |
|
Offshore financier |
Islamic Corporation for the Development of the Private Sector |
Facility |
i) SBP Islamic Refinance Scheme for Renewable Energy: PKR4.7 billion |
ii) Syndicated term finance facility (KIBOR-based): PKR4.7 billion |
|
Tenor |
i) SBP Refinance: 12 years (inclusive of a two-year grace period) |
ii) KIBOR-based STFF: 15 years (inclusive of a two-year grace period) |
|
LCY financing amount |
PKR4.7 billion |
Deal uniqueness and structure: The transaction is for one of the country’s multiple wind energy projects, which achieved financial close in 2019; it is the only wind power project that is being financed 100% under Islamic principles.
Preview of 2021
It seems like 2021 will see a substantial jump in Islamic finance transactions that are renewable energy-based. In Pakistan, a few solar projects totaling 500 MW are in advanced stages of execution and will achieve financial close in 2021. Similarly, the climatic change concerns and the focus on responsible banking are also supplementing the growth in Islamic finance and renewable energy.
Conclusion
The Islamic finance industry is projected to grow in the low- to mid-single digits in 2020/21, following an 11.4% growth in 2019. S&P is of the view that the pandemic offers an opportunity for the Islamic finance industry to move toward more integrated, transformative growth which focuses on a higher degree of standardization, with greater emphasis on the industry’s social role. Under the Renewable Energy Agenda 2030, governments around the world have set a target to build 721 GW of wind, solar, biomass, waste-to-energy, geothermal and marine power plants over the coming decade that would raise the renewable power capacity installed by 2030. There is a huge funding gap between sources available and sources required to fund the projects to meet the target. The Islamic finance industry is keen to narrow the funding gap and shall support governments to meet the Renewable Energy Agenda 2030. S&P has forecasted that the US$2.4 trillion Shariah compliant finance industry is expected to register “low- to mid-single-digit growth” in 2020 and in 2021.
Tayyaba Rasheed is the head of the Investment Banking Group at Faysal Bank. She can be contacted at [email protected].