A Series of Studies on Sukuk Issuances from different Jurisdictions IIFM 1 Series1: A study on Sukuk Issuances in Indonesia 2 August 2010 1 International Islamic Financial Market is the global standardization body for the Islamic Capital & Money Market segment of the IFSI. Its primary focus lies in the standardization of Islamic products, documentation and related processes. 2 The information on Indonesia has been extracted from Indonesia Global Sukuk offering memorandum provided by Bank Indonesia, various news sources and IIFM Sukuk In-house database. 1
DISCLAIMER IIFM has prepared this publication for general information purposes only and this does not constitute an invitation or solicitation to purchase, subscribe for or sell any Sukuk or to engage in, lead into, conclude or refrain from engaging in any transaction. IIFM or the author/s accept no liability whatsoever for any direct, indirect, consequential, or other damages and loss arising from any use of this publication. The information contained herein has been obtained from sources considered to be reliable. IIFM or the author/s makes no guarantee, representation or warranty as to its accuracy or completeness. 2
ABSRTACT This is a comprehensive study on the Sukuk issuances from year 2001 to 30 th of June 2010 in the Republic of Indonesia. The Sukuk issuances in Indonesia have seen a surge since 2008 with increased volume in domestic issues and one landmark Global Sukuk. This study discusses how Indonesian Sukuk market have seen an increase in the total number and value of Sukuk issued, the increase in sovereign issues with the implementation of the Law no.19 3 supporting legal framework to issue Sukuk by government. It also discusses the role of Indonesia in the global domestic market and, its entrance into international Sukuk arena with its inaugural Global Sukuk in the year 2009. The study also provides a bird s eye view of the total global Sukuk market for the period 2001 to H1 2010. 3 Recognition of Sovereign Commercial Paper (or Surat Berharga Negara)/ legal framework for the government to issue Shari ah-compliant commercial paper. 3
TABLE OF CONTENTS 1. Introduction 5 2- Overview of the Global Sukuk Market 6 2.1 Domestic Sukuk Market (2001 to 30 th June2010) 6 2.2 Domestic Sukuk Market (1 st Half 2010) 6 2.3 International Sukuk Market (2001 to 30 th June2010) 7 2.4 International Sukuk Market (1 st Half 2010) 8 3. Global Sukuk Market (2001 to 30 th June2010) 9 4. Sukuk in Pipeline as of 30 th June 2010 10 5. Indonesian Sukuk Market 11 5.1 Indonesia Sovereign Retail Sukuk 12 6. Snap shot of Indonesia Global Sukuk (US$650 million) 13 7. Conclusion 16 4
1. INTRODUCTION Since the Asian Financial crisis in 1997 the Indonesian economy has been growing at an exceptional rate. The increase in the country s G.D.P from 5.5% in 2005 to 6.1% in 2008 is a strong indication of the healthy growth which is continuing in 2010. The Republic of Indonesia 4 the world s largest Muslim population and the world s fourth most populous country provides a large potential for the development of the Islamic financial industry in years to come. In order to achieve its potential and play an active role in the development of the Islamic banking and finance industry at the global scale, the government of Indonesia has put in place a comprehensive plan to establish a robust Islamic banking system. For achieving this objective, in the year 2000 a National Shari ah Board was established under the Indonesia Ulema Council (Majelis Ulama Indonesia) and the Ministry Of Religious Affairs with the purpose to settle any disputes related to Islamic finance and issue fatwa (i.e. An authoritative legal opinion based on the Islamic law (Shari ah) regarding Islamic Financial instruments. Moreover, the Central Banking Act in the year 2004 allows Bank Indonesia to provide supervision and help regulate Islamic banks. Now, The Republic of Indonesia has been an active and a key player in the Islamic financial industry. From 2002 to 2007 the Islamic banking sector in the country has grown at an average year-on-year rate of approximately 57% 5. As a result the Indonesian Government has been active in issuing rupiah-denominated Sukuk in the domestic market. It also established a legal framework in order to facilitate sovereign Sukuk in the year 2008. 4 The Republic of Indonesia is in Southeast Asia and Oceania. It comprises 17,508 islands with a population of around 230 million people. Its capital city is Jakarta. (UN 2009). 5 Information extracted from global Sukuk offering memorandum. 5
2- Overview of the Global 6 Sukukk Market 2.1 Domestic Sukuk Market 7 (2001 to 30 th June2010) Amount in Million US$ 140000 120000 100000 80000 60000 40000 20000 0 124,347 17,919 35,073 747 241 4,731 5,649 8,767 16,314 17,998 16,908 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total Year The Islamic fixed profile instruments market continues to prosper despite the financial uncertainties. Although, most of the countries around the world are still coping with the financial crisis, the domestic Islamic Sukuk market seems to be active and showing signs of improvement. The table above shows the total Sukuk issued in the domestic market. Since the beginning of 2001 there has been growth each year, where in 2007 the market performance was at its peak with the total issuance amounting to US$35billion. The H1 2010 outperformed the previous year H1 2009 in terms of volume and value, the Islamic finance industry saw 36% increase in value of Sukuk issued in H1 2010 compared to H12009 and is expected to continue growing. 2.2 Domestic Sukuk Market (1 st Half 2010) Size in Million $ 20,000 15,000 10,000 5,000 349 1,759 12,554 343 1,867 36 16,908 0 Bahrain Indonesia Malaysia Qatar Saudi Arabia Others Total Country The above table shows the total domestic Sukuk issuances for the first half of the year 2010. Malaysia dominated H1 of 2010 in terms of value and volume. Besides Malaysia, Saudi Arabia with its US$1,867million issue boosted the domestic market. The government of Indonesia issued several sovereign Sukuk in the domestic market with the issuance price 6 For the purpose of this report, the term global Sukuk k includes both international and domestic Sukuk. 7 For the purpose of this report term domestic Sukuk means a Sukuk issued in a local currency. 6
ranging from US$1.52 million (IDR 14 billion) to US$ 862million (IDR803 billion) till 30 tht of June 2010.Bahrain was also active with Short term Sukuk issuances by Central Bank of Bahrain which were mostly oversubscribed 8. Qatar was also active in issuing Sukuk at domestic level. Country Wise Total Domestic Sukuk Market Distribution (1st Half 2010) 1% 2% 2% 11% 10% 74% Bahrain Indonesia Malaysia Qatar Saudi Arabia Others Malaysia leads the Domestic market at 74% in terms of value and volume for the 1 stt half of 2010 followed by Saudi Arabia (11%), Qatar (2%) and Bahrain (2%). The Indonesian Sukuk market has so far been active in the year 2010. The domestic issuance by Indonesia covers roughly about 10% of total domestic Sukuk market. 2.3 International 9 Sukuk Market (2001 to 30 th June2010) Amount in Million US$ 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 10,835 13,811 8,700 250 830 1,380 2,253 3,008 2,140 2001 2002 2003 2004 2005 2006 2007 2008 2009 2,014 45,221 2010 Total Year 8 Information extracted from press releases by Central Bank of Bahrain (CBB) 9 For the purpose of this report, the term international Sukuk means a Sukuk issued in a hard currency. 7
International Sukuk market had been growing since its first issue in 2001. Unfortunately, soon after the market picked up pace in 2006 and 2007, the world saw the beginning of one of its worst financial crisis since the Great Depression. The Sukuk market could not be immune from the effects of a worldwide contagion. The following year 2008 and 2009 could not reach the same heights in terms of issuances, so far in the international market we witnessed only 7 issues in 2010 stemming out of GCC and Asia totaling up to US$ 2,014million. Similarly in 09 the international market could only turn out 9 issues worth US$8,700million for the whole year. 2.4 International Sukuk Market (1 st Half 2010) 2500 2,014 Size in Million $ 2000 1500 1000 500 158 450 1,406 0 Brunei Saudi Arabia Malaysia Total Country The above chart illustrates the total International issuance for the H1 2010. In the arena of issuing international Sukuk we can see Malaysia still leads the market. Although, the total number of issues is only 7 for the first half of 2010 two being from Malaysia four from Brunei and one from Saudi Arabia Sukuk pipeline suggest more international issues in 2 nd half of 2010. The US$450 million issues by Saudi s Dar al-arkan was the first International issue for year 2010 structured as Sukuk al Wakala offering 10.75 rate of return. With 44% increase in H1 2010 in comparison to H1 2009 the market followers are optimistic that with the improving economic conditions investors will seek new ways to fund their projects and might steer towards Islamic financing as an alternative to conventional looking at the stability. 8
3. Global 10 Sukuk Market (2001 to 30 th June2010) 200 169,568 150 Size in Million US$ 100 50 0 997 1,071 2001 2002 2003 6,1111 7,902 11,775 28,754 48,884 18,454 26,698 18,922 2004 2005 2006 2007 2008 2009 Year 2010 Total issued As the global crisis continues, the globall Sukuk market mainly due to domestic issuances has witnessed an encouraging growth and Sukuk issuances is currently performing better compared to year 2009. The number of total global Sukuk issuance increased by 38% % in first half of 2010 compared to that of 2009. 2% Country Wise Total Global Sukuk Market Distribution (First Half 2010) 1% 2% 1% 12% 9% 73% Bahrain Brunei Darussalam Indonesia Malaysia Qatar Saudi Arabia Singapore Malaysia leads the global Sukuk issuance by covering about 73% of the total Sukuk market in H1 of 2010. Saudi Arabia (12%) and Indonesia (9%) fall right under Malaysia. Malaysia dominated the H1 of 2010 of the global Sukuk market with the highest number of total issues adding up to US$14billion. The H1 of 2010 is dominated by Sovereign issues covering the global Sukuk market by 61%. National Bank of Abu Dhabi issued its first Sukuk on 28 th June, 2010 the first issue to be denominated in Malaysian ringgit. The MYR 500 million (US$ 155) structured as Sukuk Murabaha offers 4.75% fixed rate of return per annum. Malaysia also sold its 2 nd global Sovereign Sukuk in 8 years for the amount of US$ 1250 million 10 For the purpose of this report, the term global Sukuk includ des both international and domestic Sukuk 9
structured as Sukuk Al Ijarah offering 3.93% rate of return. The proceeds from global Sukuk will be used by the Government of Malaysia for general purpose. Total Global Sukuk Distribution by Entity Type (2001 to 30th June 2010) Quasi.Sovereign US$20,275 (12%) Sovereign US$50,716 (30%) Corporate US$ 98,577 (58%) Corporate Sovereign Quasi.Sovereign The global Sukuk market is dominated by the corporate issues in terms of value, 58% of the total issues falls under the category of corporate banner and the remaining is covered by 30% sovereign and 12% by quasi-sovereign respectively 11. 4. Sukuk in Pipeline 12 as of 30 th June 2010 Size in million USS 15000 10000 5000 0 5,431 865 880 650 300 155 500 750 200 1,500 563 3001,000 1,400 272 77 14,843 Country According to various news sources, the Government of Indonesia initially announced to sell $650 million global Sukuk in the Q4 of 2010 13, however, the highly anticipated Sukuk by Indonesia is delayed given its lower budgetary requirements forecast and resulting reduction in 20100 borrowing 14. On a global front a number of jurisdictions as well as Corporates have indicated their intention to issue Sukuk. Among the expected new entrants in Sukuk market the most prominent issuances could be from Turkey, Russia, France, Iran, Jordan and Hong Kong. The above table lists the Sukuk which are expected to be issued during 2010 and beyond and will add around US$15billion in Int l and domestic Sukuk markets. 11 In house IIFM Sukuk issuance database 12 Pipeline estimation based on information collected till 30 th June, 2010 from various sources such as http:// //www.businessweek.com etc. 13 Asia online <http://www.asiaone.com> 14 Reuters< http://www.reuters.com> 10
5. Indonesian Sukuk Market The Republic of Indonesia entered the Sukuk market with its first domestic issue in 2002, structured as Mudarabah issued by PT Indosat Tbk and since then has played an active role domestically issuing rupiah-denominated Sukuk. Although, Indonesia has been issuing Sukuk however, all of the issuances by Indonesia have been Domestic issues, with only one global Sukuk issued in 2009 for US$650 million(idr 7030 billion), which was structured as Sukuk Al- Ijarah providing 8.80% rate of return per annum having 5 year maturity 15. Table: - Indonesia Total Sukuk Issuance (2002 30th June 2010) Year Total issued Amount(US $ Million) 2002 1 19 2003 5 65 2004 7 87 2005 3 68 2006 1 21 2007 15 270 2008 9 740 2009 20 1,669 2010 16 1,759 Total 77 4,698 Source: In house IIFM Sukuk issuance database 1USD=9.044IDR The table above shows the total issues by Indonesia since the beginning of 2002. It is clear from the table there has been growing demand for Sukuk and with each year we have a seen surge in the number of issuances in Indonesia. The first ever Sukuk issued out of Indonesia by PT Indosat Tbk was structured as Sukuk Al- Mudarabah with a tenor of 5 years for the amount of US$19 million (IDR 175 billion). In 2008 Indonesia adapted law on the sovereign Sukuk. The Republic of Indonesia issued two sovereign Sukuk on the 26 th of August 2008 namely SBSN Seri IFR0001 and SBSB Seri IFR0002. The US$295 million (IDR 2.714,70 billion) SBSN Seri IFR 0001 structured as Sukuk al Ijarah offered 11.80% rate of return with a maturity period of 7 years. Similarly US$16 million (IDR 1.985,00 billion) SBSB Seri IFR0002 offered 11.95% rate of return with 10 year maturity also structured as Ijarah, the proceeds from these issuances would be implemented towards the promotion and development of Islamic Finance industry and to cover the state budget deficit. So far, in H1 2010 Indonesia has 16 issues providing a total of US$1,759 million, compared to the previous year 2009 where the total issuance amounted to US$1,669 million for the whole year. 15 In house IIFM Sukuk issuance database and information provided by Bank Indonesia 11
List of Total Sovereign Sukuk issued by Indonesia (till 30 th June 2010) (Including Domestic, International & Retail Sukuk) Date Name of Sovereign Sukuk Sukuk Structure Amount ( Billion IDR) Rate of Return Tenor (months) 26-Aug-08 SBSB Seri IFR0001 Sukuk Al Ijarah 271,470 11.80% 84 26-Aug-08 SBSB Seri IFR0002 Sukuk Al Ijarah 198,500 11.95% 120 26-Feb-09 Sukuk Ritail Seri SR-001 Sukuk Al Ijarah 555,629 12.00% 36 23-Apr-09 Global Sukuk SNI 14 * Sukuk Al Ijarah 586,430 8.80% 60 7-May-09 SDHI-2010-A Sukuk Al Ijarah 150,000 8.52% - 24-Jun-09 SDHI-2010-B Sukuk Al Ijarah 85,000 7.83% - 24-Jun-09 SDHI-2010-C Sukuk Al Ijarah 33,600 7.89% - 29-Oct-09 SBSB Seri IFR0003-20,000 9.25% 72 12-Nov-09 SBSB Seri IFR0003-52,700 9.25% 72 12-Nov-09 SBSB Seri IFR0004-55,000 9.00% 48 19-Jan-10 SBSB Seri IFR0005-10,500 9.00% 84 19-Jan-10 SBSB Seri IFR0007-79,000 10.25% 180 21-Jan-10 SBSN Seri IFR0003-5,500 9.50% 72 10-Feb-10 SBSN Ritail Seri SR-002-803,386 8.70% 36 3-Mar-10 SDHI--2012-A Sukuk Al Ijarah 334,200 7.61% - 11-Mar-10 SBSN Seri IFR0003-52,500 9.25% 36 11-Mar-10 SBSN Seri IFR0005-1,400 9.00% 48 11-Mar-10 SBSN Seri IFR0007-46,000 10.25% 180 1-Apr-10 SBSN Seri IFR0003-30,000 9.25% 36 1-Apr-10 SBSN Seri IFR0006-32,000 10.25% 240 15-Apr-10 SBSN Seri IFR0003-15,000 9.25% 36 15-Apr-10 SBSN Seri IFR0006-67,500 10.25% 240 15-Apr-10 SBSN Seri IFR0008-10,000 8.80% 120 29-Apr-10 SBSN Seri IFR0003-20,000 9.25% 72 Total 15 3,515,315 Source: Bank Indonesia. (*Global Sukuk amount USD 650 million Exchange rate 1USD/IDR 9.022 at issuance). Indonesia Sovereign Retail Sukuk (Seri SR-001-2009 - Seri SR-002-2010) 16 The above mentioned Sukuk are Shari ah compliant and a financing instrument for the government which can be owned by Indonesian citizens, any non citizen individuals can own this retail Sukuk as well by buying it from the secondary market. Republic of Indonesia issued its First Retail Sukuk series (SBSN Ritail Seri SR-001) on 26 th February 2009 which carried a 12% coupon rate amounting to US$464.50 million (IDR 555,629 billion). Under retail Sukuk the compensation is paid either on monthly or annual basis. Due to popularity amongst the investors and oversubscription to the first retail Sukuk, the second Sukuk series2 (SBSN Ritail Seri SR-002) was issued on the 10 th of February 2010. This Sukuk (series2) offers 8.70% rate of return with a maturity period of 36 months amounting to US$ 862 million (IDR 803,386 billion). Both Series 001 and 002 of the retail Sukuk are based on Sukuk Al Ijarah. 16 Information extracted from Indonesia prospectus on Retail Sukuk. 12
6. Snap shot of Indonesia Global 17 Sukuk (US$650 million) Basic Information The Republic of Indonesia (ROI) issued its global Sukuk in April 2009. The Sukuk was launched under a separate legal entity, the Perusahaan Penerbit SBSN Indonesia 1, which acts as a trustee on behalf of the ROI; it was issued on the back of a Special Purpose Vehicle (SPV) and the assets identified under this vehicle consist of approximately 66 real properties used for government purposes, including buildings, improvements and fixtures thereon, located in Bandung and Jakarta. These properties could be replaced by a substitution under the Substitution Agreement. The government will use the proceeds from the planned Sukuk to help plug the deficit in its budget. The Sukuk is US-dollar denominated with a size of USD 650 million; its tenure is 5 years that will mature in April 2014 with semiannual payments at a rate of 8.8%. The lead managers and book runners for this Sukuk are Barclays Bank, HSBC and Standard chartered whereas the principal paying agent is Bank of New York Mellon. The Sukuk is listed on Singapore stock exchange. Structure of the Issue The issuance uses the Sukuk Ijarah sale and leaseback scheme in which one party solely acts, or through its representative, sells or leases its beneficial rights to an asset to the other party based on an agreed price and duration, without the transfer of asset ownership. The Sukuk is issued against that SPV under Purchase agreement at the time of issuance and the seller (The issuer) sells the Beneficial Sukuk-holders. In this case, ROI sells the beneficial title of the asset to a special purpose vehicle (SPV). Process Asset specific Sukuk based on Ijarah (Sale & Lease Back) 8. Offices & lands are sold back t o ROI at t he end of lease period Republic of Indonesia (ROI) 1. ROI owns government offices & lands having value in use Government offices & lands The establishment and administration of the SPV for this SBSN is regulated by Government Regulation Nos. 56 and 57 (2008). Subsequently, the SPV offers the Sukuk for sale to investors. The government secures the funds from the sale of assets to investors through the SPV. SBSN acts a trustee and leases the asset to ROI (in its capacity as a lessee) for a lease period that matches the Sukuk tenor. 2. ROI parks t hese offices & land in an SPV 4. Sukuk proceeds 5. Offices and lands are leased back t o ROI Bank for its use 6. ROI pays rent al for use of offices & lands for the lease period 3. SPV issues Sukuk against Beneficial Ownership of the offices & land and receive cash proceeds Special Purpose Vehicle (SPV) 7. Pay coupon payments Investors / IFIs 17 First ever global Sukuk out of Indonesia issued on 23th April 2009. 13
The periodic lease rental payments are predetermined and calculated based on a fixed percentage. ROI as lessee shall pay the lease rental payments on certain Periodic Distribution Dates, which shall be paid out by the Trustee to the Sukuk-holders as periodic distribution amounts of the Sukuk. The Trustee, SBSN (on behalf of the Sukuk-holders, and in its capacity as a Lessor) appoints ROI as its Service Agent to carry out, or procure the carrying out of, all Major Maintenance of the Sukuk Assets and to procure insurance of the Sukuk Assets on behalf of the Lessor. Through a Purchase Undertaking, ROI undertakes to purchase the Sukuk Assets, in case of the occurrence of a dissolution event or at the maturity of the Sukuk tenor, at an Exercise Price. This exercise price is used by SBSN (The trustee) to pay off the redemption amount in return of the Sukuk certificates. The Sukuk may be purchased by any party and is easily tradable. At the time of issuance, it was rated BB- by Standard & Poor s, whereas Moody s rated it as Ba3. ISSUER GOVERNING LAW AKAD (AGREEMENT) Perusahaan Penerbit SBSN Indonesia Law No 19, year 2008 regarding SBSN Ijarah sale and leaseback MATURITY 5 years YIELD Fixed rate at 8.8% NOMINAL VALUE USE OF PROCEEDS SBSN REDEMPTION IJARAH PAYMENT FREQUENCY SBSN ASSETS PAYMENT/ ADMINISTRATION AGENT LISTING Nominal value is at par value i.e, USD 650 million The net proceeds from the SBSN Ijarah sale and leaseback (Sukuk Issuance) will be used by the government of Indonesia to fund the government state budget The SBSN will be redeemed at par value Paid periodically every six months Government properties such as land and buildings in Bandung and Jakarta Bank Indonesia Singapore Stock Exchange 14
Geographical Distribution of the Sukuk investors A significant share of Indonesian sovereign Sukuk is held by Asian investors followed by Middle East based investors since concentration of Shari ah compliant FI s are more prevalent in these regions. 11% Geographic Distribution 19% 40% 30% Middle Eastern and Islamic investors Asia Investors (including Indonesia) US Investors European Investors Since this Sukuk can be categorized as medium to long term Sukuk, it is mostly held by large FI s like Funds and banks. Majority of funds have long term investment horizons (for instance, pension fund), hence their investment objective is to invest in safe and regular income generating asset class. These Sovereign Sukuk are ideal investments for their portfolio as it fulfills their requirements. 14% 37% 4% 45% Investor Class Funds Banks Retail Investors Insurance and Pension Funds 15
7. Conclusion Global Domestic Sukuk issuances form bulk of total Sukuk volume and it is expected that Sukuk at jurisdiction level will continue to grow faster than international. The domestic market covers 73 % of the global Sukuk market as of June 30 th 2010. Republic of Indonesia covers roughly 3% of total Global Sukuk market at present. Indonesia domestic issuances as of 1H 2010 are on the rise and this trend is expected to continue given Indonesia s strong expected economic growth. The sovereign issuances dominate Sukuk market in Indonesia covering the market by roughly 79% in terms of value. Since the adaption to law supporting sovereign Sukuk in 2008 Indonesian market saw total of 15 sovereign issues till 30 th June 2010. Although, all the issuances in the H1 2010 have been domestic, it indicates growing demand and interest from investors and the need for more issuances. Proceeds rooted out of the domestic Sukuk is used by Indonesia to cover vast projects related to government sector, Banking and Credit intermediation, construction, property development, engineering, Electric products manufacturing etc. According to market analyst the Sukuk market has potential to reach new heights with the active market issuers like Malaysia, Indonesia, Singapore and Brunei from Asia and countries from GCC region like Bahrain, Saudi Arabia, UAE and Qatar etc issuing Sukuk domestically as well as at the global level and attracting investors from all over the globe. 16