Tunnel authority considering Islamic bond sale

Trans-caledon hopes to raise R26bn from growing market for sharia-compliant debt, writes Jaco Visser

TRANS-Caledon Tunnel Authority, a builder of dams and water tunnels, is considering an Islamic bond sale, one of at least three South African companies seeking to tap a market on track for record sales this year.

Trans-Caledon may issue the sharia-compliant debt to help raise R26bn once the government establishes a benchmark with its own sale, Zodwa Mbele, the state-owned company’s executive manager for project finance and treasury, said yesterday. Sukuk yields are within five basis points of a record low and 19 basis points below South African dollar bonds, according to HSBC, Nasdaq and JPMorgan Chase indices.

Worldwide

offerings

of Islamic bonds jumped 89% to $36.3bn this year, about $400m short of last year’s record, according to data compiled by Bloomberg, as demand from Asia and the oil-rich Persian gulf pushes yields lower.

Eskom and Transnet are also weighing sukuk sales.

“If one issuer is successful in this regard and it makes sense from a cost of capital point of view, it is likely that others will follow,” Jason Lightfoot, who helps to manage the equivalent of $13.2bn of fixed-income funds at Futuregrowth Asset Management, said in an e-mailed response to questions. “It opens up a new market for TransCaledon to tap. It also ensures additional avenues for capital.”

Governments are turning to the Islamic debt market after the average yield dropped 102 basis points this year to a record of 2.97% on September 14, according to the HSBC/Nasdaq Dubai Sukuk Dollar index.

The average yield on sukuk is 11.8% less than the record high of 14.9% in February 2009, the data shows.

The Islamic finance industry is set to expand to $2.8-trillion by 2015, according to the Kuala Lumpur-based Islamic Financial Services Board. Malaysia is the world’s biggest market for sukuk, which pay returns on assets in accordance with Islam’s ban on interest. Sukuk issues this year could “easily hit” $50bn as attractive pricing is prompting more issuers to gain access to the market, according to Commerzbank.

Transnet may consider issuing Samurai bonds or Islamic debt to diversify its funding, CEO Brian Molefe said on May 17. Samurai bonds are securities denominated in yen and sold in Japan by overseas borrowers. Eskom is in talks with the Treasury about issuing an Islamic bond, finance director Paul O’Flaherty said on June 8.

Standard Bank and BNP Paribas were among six companies hired to advise on the government’s sukuk issue. SA expects to complete the sale this fiscal year, which ends in March, Thuto Shomang, head of asset and liability management at the Treasury, said on May 17.

Tshepiso Moahloli, a senior analyst in the Pretoria-based Treasury, said in an e-mailed response to questions: “The team is hard at work to ensure that we issue a successful debut sukuk.

“Unlike a conventional bond, sukuk is much more complex than that and it requires certain provisions to be in place.”

“There are a lot of Islamic funds in the Middle East looking for some sort of yield and new sukuk get taken up very quickly,” said Mohamed Shafee Loonat, a portfolio manager at Element Investment Managers in Cape Town. Bloomberg