Africa Finance Corporation issues US$150m maiden Sukuk

09Feb 2017
The Guardian Reporter
The Guardian
Africa Finance Corporation issues US$150m maiden Sukuk

Lagos-based Africa Finance Corporation (AFC), a leading pan-African private-sector infrastructure investment developer, has issued its maiden sukuk.

The A3 senior unsecured rating by Moody’s Investors Service is the highest-ever rated Islamic bonds issuance from an African institution, AFC said in a statement.

A Moody’s A3 rating is a long-term rating considered an upper-medium investment grade and low credit risk.

Although similar to traditional bonds, sukuk are linked to specific assets partially owned by investors. Interest is forbidden under Sharia law. Rather than earning interest, as is the case with traditional debt issuance, sukuk holders have beneficial ownership of the underlying assets and can share in the revenue created by these assets.

AFC’s initial target of US$100 million was more than twice oversubscribed, resulting in the transaction being raised to US$150 million and a final order book of about US$230 million, AFC said in a press release.

This sukuk is AFC’s second foray into Islamic finance. It accepted a US$50-million, 15-year line of financing from the Islamic Development Bank (IDB) in 2015 to finance Islamic finance-compliant projects located in numerous African IDB member countries.

Islamic finance is in its early stages in Africa but the potential is getting huge attention from financiers on the continent, due in part to the demographic realities of Africa, Kurt Davis wrote in an AFKInsider report. Nearly half the countries in Africa have populations where Muslims account for 40 per cent or more.

Africa’s infrastructure deficit needs around US$90 billion in investment each year for the next 10 years, according to consulting firm EY. Sukuk could be an affordable way for African governments to fill the gap, especially given the relatively low yields offered.

“Moreover, sukuk are open to Sharia-compliant and non-Sharia compliant investors, so the pool that this type of debt can tap into is much larger than with conventional bonds,” said Imran Mufti, partner at Riyadh-based law firm Hogan Lovells, in an African Business Magazine report. Each African sukuk has been oversubscribed, he said.

How sukuk works
This form of financing confronts the lifelong convention in finance of receiving interest on a loan. It’s simple. No interest on investments but the lender and borrower share the returns.

The global financial system depends on the founding concept that money itself is a commodity that needs not be invested into an underlying commodity to have value, Davis said. Money can be leveraged to create greater returns through the application of derivatives. Critics label these as leveraged and speculative winning, or more euphemistically, returns making money out of nothing. This can ultimately have catastrophic results.

Islamic finance theoretically eliminates the speculative nature of conventional finance. In prohibiting the “unjustified enrichment” and “speculation or excessive risk,” Islamic scholars pushed three principles:

These, for practical purposes, distinguished Islamic finance form all other counterparts. Prohibition of interest or riba generally translates that lending money should not generate “unjustified income.” Profit and loss sharing accordingly emphasizes a partnership where partners shares profits and losses on the basis of their invested capital. Gharar simply means no speculation, Davis said.

AFC’s sukuk is a privately placed, 100-per cent Murabaha sukuk, the firm said in a statement.

According to the rules of Sharia, Murabahah sukuk should not be traded at secondary market due to the fact that it involved the sale of debt, which is forbidden. However, Murabahah sukuk can be negotiated at the secondary market if it forms a small part of a larger portfolio comprising other negotiable instruments such as Ijarah sukuk, Musharakah, and Mudarabah sukuk certificates, according to the European Research Centre for Islamic Finance.

The AFC sukuk will mature on January 24, 2020. Emirates NBD Capital, MUFG and RMB acted as joint bookrunners and lead managers. Emirates NBD Capital acted as sole global coordinator.

“The core values of Islamic finance, the need to invest ethically in assets that have a tangible positive social impact, made a sukuk issuance a natural choice for us,” said Andrew Alli, president and CEO of AFC, in a prepared statement. “We offer global investors the chance to be involved in high-impact infrastructure projects that not only promote social and economic development across Africa but also generate economic returns for our investors.

“This Sukuk represents a milestone in our financing activities, a milestone that will enable us to further diversify our funding sources, to build new relationships with key investors in international markets and help us diversify our portfolio of projects to continue delivering real impact across the continent.”

AFC has a diverse funding base, with a range of funding from sources across different markets. In 2015 AFC’s inaugural US$750 million five-year international bond was more than six times oversubscribed at over US$4.7 billion, attracting institutional investors from the US, Asia, Europe, and Middle East.

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