South Africa ZAR-denominated Al Ijara Sukuk
The Republic of South Africa (RSA) has announced the issuance of its inaugural domestic rand denominated Al Ijara Sukuk.
In 2014, RSA successfully concluded its debut $500 million 5.75-year Al Ijara Sukuk issuance in the international capital markets. The issuance was more than four times subscribed, attracted participation from both banks (49%) and asset managers (24%), and enjoyed higher participation from the Middle East. The Al Ijara Sukuk was repaid at maturity. This Sukuk issuance will build on the success of the 2014 dollar denominated Sukuk and is viewed as a way for National Treasury to access new pools of capital in the rand market. There are a limited number of Shari'ah compliant investment instruments available in the local market - particularly in the fixed income space. This issuance will address this gap and provide a benchmark for future issuances of this nature.
The Al Ijara Sukuk structure
The structure has been confirmed by the respective Shari'ah Advisory Committees of FirstRand and Standard Bank. At its core, for an instrument to be Shari'ah compliant it cannot earn or make interest payments. The Sukuk must therefore be structured differently to a conventional government bond.
The Ijarah assets
The asset pool to which the RSA Trust will have rights (Usufruct) will consist of ~R36.3 billion in assets currently owned and managed by the Department of Water and Sanitation (DWS) including Land (~R4.8 billion), Canals (~R1.8 billion), Dams (R19.8 billion), Pipelines (~R3.7 billion), Tunnels (~R5 billion), and other assets like pump stations, reservoirs, telemetry, water treatment facilities and measuring facilities (~R1.2 billion).
Other important details
FNB Stockbroking and Portfolio Management view
It is expected that the periodic payment yield will be in-line with the yield on a conventional bond of the same tenure. Because of liquidity constraints, the payment yield may be slightly above that of the yield on the corresponding conventional bond. At times, Sukuks can trade below conventional bond yields which could be a function of market demand, or the very specific asset-backed structures they require.
We view this instrument as an appropriate and long overdue diversifier for the Shari'ah investor. The “fixed income” nature of the instrument will complement existing equity, cash, and property holdings to create a more balanced portfolio. Conventional South African bonds yields are currently regarded as attractive. Should the Sukuks trade in-line with their conventional counterparts, we view this as an opportune time to gain exposure and reduce overall portfolio risk.
How to apply
Please email your application amount and the tenure you would like to apply for to shares@fnb.co.za before 16:00 on Tuesday, 21 November 2023. Please note that applications will be made “at market” and pricing will be determined in the auction. Please ensure your account is adequately funded when you apply.
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