Africa Deal of the Year
Carving a mark in history, Nigeria auctioned its first NGN10 billion (US$59.82 million) Sukuk Ijarah on the 10th October 2013. Issued by the government of Osun State, the seven-year Sukuk is due for maturity in the year 2020 at a profit rate of 14.75%. The issuance witnessed an oversubscription of NGN1.4 billion (US$8.66 million) to reach a final amount of NGN11.4 billion (US$70.53 million), bearing testament to the healthy appetite for alternative financing structures in Nigeria. Aimed at soft infrastructure and educational projects, the proceeds therefrom will be used for the construction 27 schools across the state, comprising 23 high schools, two middle schools and two elementary schools.
Summary of terms & conditions | |
Size | NGN11.4 billion (US$73.53 million) |
Issuer | Government of Osun |
Lead Arranger | Lotus Capital |
Co-Arrangers | Chapel Hill Advisory Partners, FBN Capital, FCMB Capital Markets, Fidelity Securities, Greenwich Trust, Lead Capital, Marina Securities, Oceanic Capital Co, Pan African Capital, Phoenix Global Capital Market, Skye Financial Services, Stanbic IBTC Capital, Sterling Capital Markets, Uni Capital, Union Capital Markets, Zenith Securities |
Legal Counsel for Issuer | FO Fagbohungbe & Co, Kola Awodein & Co |
Legal Counsel for Trustee | Tope Adebayo |
Shariah Advisors | Professor Dr Monzer Kahf, Professor Muhammad L Bashar, Dr Elgari |
In an exclusive interview with Islamic Finance
news, Lotus Capital, the lead manager and principal advisor for the issuance, revealed that among the challenges faced in constructing the deal were: the lack of a solid regulatory framework, limited exposure and understanding of Sukuk by institutional investors in terms of its structural principles and the technical differences with conventional bonds, as well as the misconception of cultural and religious stigma affiliated to Islamic finance.
Measures that were taken to resolve these hurdles include media-related initiatives to educate Nigerians on Islamic finance such as presentations in seminars and television broadcasting. The arrangers also took the effort of working closely with relevant regulators for the establishment and standardization of policies for Sukuk issuances. On top of that, the Sukuk structure was also approved by the Financial Regulation Advisory Council of Experts, a council set up by the Central Bank of Nigeria to ensure that products and services offered by the non-interest financial institutions in Nigeria satisfy the requirements for compliance.
Being the first Sukuk issued in Nigeria, the team was very cautious in selecting the appropriate structure for the transaction. Lotus explained that the Ijarah structure was selected due to its simplistic features in terms of flexibility, tradability and suitability in funding construction projects. Unlike the Murabahah structure, this structure enables secondary trading of the Sukuk instrument on an exchange, which in turn, helps to increase the involvement of investors in the deal. Additionally, the Ijarah contract is innately designed to produce periodic rental payments which automatically act as coupon payments for Sukukholders.
The certificates were taken up by local banks, fund managers, insurance companies and high net worth individuals in Nigeria. Assigned an “A” rating by local rating agency, Agusto & Co, the issuance represents the second tranche of Osun State’s NGN60 billion (US$371.22 million) debt-raising program which commenced last year.
Lotus Capital had previously executed a private Sukuk issuance which was used to finance the construction of luxury flats. This was however on a smaller scale as compared to Osun’s Sukuk issuance, as it was not a public issue. Lotus has put together Islamic finance deals of varying sizes ranging from Murabahah asset finance to Musharakah and Ijarah.