South African state-owned companies Eskom Holdings SOC Ltd. and Transnet SOC Ltd. are weighing Islamic bond sales after the government sold its first sukuk at a record-low cost.
Eskom, the national power utility, said yesterday it will use the sovereign sale as a “barometer” for its own financing plans, while rail and ports operator Transnet has said it may access the market amid growing demand for Shariah-compliant debt. Al Baraka Bank, the local unit of Bahrain-based Al Baraka Banking Group, is awaiting regulatory approval for a 300 million-rand ($29 million) issue next year, it said yesterday.
Global Islamic bond sales surged 37 percent this year as demand for debt that complies with Islam’s ban on interest lures first-time issuers. The U.K. sold its first bond in June, with investors bidding for 10 times the amount offered, while Hong Kong and Goldman Sachs Group Inc. also tapped the market in the past month. In Turkey, two banks sold the securities within a year of the nation’s first sovereign issue in September 2013.
“There’s a huge pool of money trying to access Shariah- compliant debt, and when it comes to the African continent there’s virtually no supply,” Samir Gadio, head of African strategy at Standard Chartered Plc, said by phone from London yesterday. “So there will be some interest from corporates, especially in South Africa.”
South Africa sold $500 million of Shariah-compliant bonds two days ago at a 3.9 percent profit rate, the lowest rate out of 14 dollar bonds issued since 1994, according to data compiled by Bloomberg. Investors bid for $2.2 billion of the debt. Yields on the bonds rose 10 basis points to 4 percent by 5:30 p.m. in Johannesburg yesterday.
The number of sovereign sukuk sales climbed to a record this year through yesterday with 153 issues from 13 countries, according to data tracked by Bloomberg since 2001. That compares with 136 sales from 11 countries in 2013. Sovereign sales are set to reach $30 billion this year, an increase of 30 percent over last year, according to Moody’s Investors Service.
The average yield on Islamic debt has fallen 55 basis points this year to 2.87 percent yesterday, according to an index from Deutsche Bank AG. That compares with a 38-basis-point decline in the average yield on global debt tracked by JPMorgan Chase & Co. indexes.
“Given the quantum of Eskom’s funding plans, there is certainly value in sukuk funding to diversify its funding sources,” the Johannesburg-based utility said in an e-mailed response to questions. The company said it was waiting for amendments to tax law, which would make sukuk funding cheaper, before proceeding.
Transnet said in April it would consider sukuk as a funding option, pending the sovereign issue. The company didn’t immediately respond to Bloomberg’s e-mailed requests for comment yesterday.
Al Baraka’s Turkish unit sold 350 million pounds ($574 million) of five-year sukuk on June 24 at a profit rate of 6.25 percent. The yield has dropped 18 basis points to 6.07 percent yesterday, compared with a one-point increase in average sukuk yields.
“More diversity in the sukuk market is a good thing for investors,” Thomas Christie, head of fixed income at Prometheus Capital Finance Ltd., said by phone from Dubai. “There will be demand for issuance by well-run entities such as the South African corporates.”
©2014 Bloomberg News