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Thursday, 23 May 2019

SRI Bond, Islamic Issue

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The Republic of Indonesia laid down an important marker in Asia’s sustainable finance arena, becoming the first sovereign in the region to sell Green securities to offshore investors, and the first worldwide to sell Green sukuk.

The government issued a US$1.25bn five-year Green sukuk alongside a US$1.75bn conventional 10-year sukuk, completing its first US dollar Islamic issue since a rating upgrade from S&P in May 2017 lifted it to full investment-grade status.

The shorter tranche suited the maturity preferences of dedicated Green funds, which took as much as one fifth of that portion, by some estimates. Islamic investors, who share some of the same social motivations, took about a third of the paper, highlighting the role of alternative investor bases in funding sustainable development.

Indonesia (Baa3/BBB–/BBB) at the time has become an increasingly savvy, and prolific, issuer in the international bond markets in recent years, and has grown an investor following.

Still, some work was required to establish a framework for its Green wakala sukuk, which is backed by state-owned assets such as land and buildings, as well as projects under construction.

Proceeds were allocated to green projects that will promote Indonesia’s transition to a low-emission economy and climate-resilient growth.

The Green sukuk and framework received a “Medium Green” rating from the Center for International Climate Research (Cicero), an acknowledgement that Indonesia has some way to go on its journey towards sustainability. President Joko Widodo has set a target of cutting emissions by at least 29% by 2030.

The deal came in February, taking advantage of a supportive market window following a period of volatility, and achieved the lowest Treasury spreads on the two tranches for an Indonesian sovereign sukuk.

The US$1.25bn five-year sukuk priced at 3.75%, equivalent to Treasuries plus 109.5bp, tightening from guidance of 4.05% area. Orders totalled US$3bn for that tranche, as the 144A/Reg S format helped to reach a broad investor base and meant that Indonesia paid only a single-digit new issue premium.

Asian accounts took 25%, the US 18%, Europe 15%, Indonesia 10% and “Islamic” 32%, giving a diverse geographic distribution. Banks booked 40% and fund managers 29%, while high-quality accounts like central banks and sovereign wealth funds took 20% and insurers and pension funds a combined 10%.

Perusahaan Penerbit SBSN Indonesia III was the issuance vehicle on behalf of the government.

CIMB, Citigroup, Dubai Islamic Bank, HSBC and Abu Dhabi Islamic Bank were joint bookrunners. CIMB was sole principal adviser, while HSBC was green structuring adviser.

To see the digital version of this review, please click here .

To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com .

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