Indonesia sukuk increases sovereign flexibility

Author: Ashley Lee | Published: 18 Sep 2014
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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 4.625%.

But it was markedly different from government’s previous US dollar sukuk offerings, as well as other sovereign sukuk.

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 al-ijarah;
  • 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.

Additional flexibility

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 and bridges.

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 structure

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.

Growing GCC importance

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 comfort.

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.

Tear sheet

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.

See also

An IFLR guide to the evolution of global sukuk structures

SA sukuk cements Islamic finance ascendancy

UK sukuk first explained