The Republic of Indonesia structured its recent
sukuk to permit greater flexibility in its underlying
assets. Other sovereigns are expected to follow.
The 10-year $1.5 billion sukuk was issued on
September 10. It attracted an order book worth over $10
billion with 35% of investors coming from the Middle East, and
pricing tightening to yield 4.35% after initial guidance of
But it was markedly different from government’s
previous US dollar sukuk offerings, as well as other
The transaction was interesting on a number of different
levels, said Shibeer Ahmed, partner at White & Case in
Dubai, who advised the joint lead managers.
It involved an innovative dual-tranche structure. It also
included – for the first time – a Gulf
Cooperation Council (GCC)-based shariah board in addition to
the shariah boards of the international banks that approved the
government’s previous sukuk issues.
- The Republic of Indonesia’s recent
sukuk included project assets under the
wakalah structure to facilitate infrastructure
development, as well as the typical sukuk
- The new structure grants additional flexibility
to sovereigns, who may find it difficult to identify
unencumbered shariah-compliant assets;
- This is also the first bond from the Republic of
Indonesia that included a GCC-based shariah board in addition
to those of the international banks.
Most sovereign sukuk, including those recently
issued by the UK and Hong Kong governments, are structured as
sukuk al-ijarah. And previous sukuk sold by
the Republic of Indonesia under this programme – the
Trust Certificate Issuance Programme – were structured
as sukuk al-ijarah.
Vicky Jones, counsel at Norton Rose Fulbright, explained
that under this structure property assets are sold to a special
purpose vehicle issuer and then leased back under the lease
agreement to generate payments under the bonds.
Fifty-one percent of the deal is under the
sale-and-leaseback structure involving existing properties,
while the issuer has used project assets under the
wakalah structure for the other 49%. That will be used
by the Indonesian government to fund the construction and
development of public infrastructure assets such as toll roads
It may also solve the challenge of finding shariah-compliant
assets for sovereign sukuk. "When putting together
multi-billion dollar offerings, it can be difficult to find
unencumbered real estate acceptable from a shariah
perspective," Ahmed said.
There is no reason that
over sovereigns cannot use this or a similar
This structure facilitates infrastructure financing. It
allows part of the sukuk to be raised against
infrastructure assets that are either under construction or
will be constructed during the procurement period. Those
infrastructure assets will then enter the pool of leased assets
once they are delivered.
In terms of documentation, Ahmed said there are essentially
two sets of documents: one for the 51% sale-and-leaseback, and
another for the shariah-compliant infrastructure financing
which involves a procurement agreement.
The inclusion of a
GCC-based shariah board highlights the importance of Middle
East investors in the Islamic finance market.
Although there are efforts to standardise acceptable
shariah-compliant structures between Malaysia and the Middle
East, having a GCC-based shariah board gave investors more
That may have increased GCC interest in these bonds: 35% of
investors in this year’s sukuk were from
the Middle East, compared to 20% in the
government’s 5.5-year US-dollar denominated
sukuk last year.
More to come
Ahmed expects similar structures to be used in future
offerings. "There is no reason that over sovereigns cannot use
this or a similar structure," he said.
Most countries around the world have a need to invest in
public infrastructure, and this type of sukuk
structure opens up that possibility, he added.
In particular, it creates new opportunities for emerging
sovereigns such as Pakistan, Tunisia and South Africa
– all of which are
reported to be considering selling sukuk
– to finance much-needed infrastructure.
Allen & Overy acted for the Republic of Indonesia, while
White & Case advised joint bookrunners CIMB, Emirates NDB,
HSBC and Standard Chartered.
Norton Rose Fulbright represented the Bank of New York
Mellon, which is the delegate on the transaction.
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