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 might issue the sharia-compliant debt to help raise R26 billion once the government had established a benchmark with its own sale, Zodwa Mbele, the parastatal’s executive manager for project finance and treasury, said this week. Sukuk yields are within 5 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 have jumped 89 percent to $36.3 billion (R303.2bn) this year, about $400 million 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 of Futuregrowth Asset Management said. “It opens up a new market for Trans-Caledon 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 low of 2.97 percent on September 14, according to the HSBC/Nasdaq Dubai Sukuk Dollar index. The index rose to 3.02 percent on Monday.

The average yield is 11.8 percentage points lower than the record high of 14.9 percent in February 2009, the data show.

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 access the market, according to Commerzbank.

The average yield on South African dollar bonds dropped 123 basis points, or 1.23 percentage points, this year to a record low of 3.02 percent in August, JPMorgan’s emerging markets index showed. The yield was at 3.21 percent on Monday.

Turkey sold $1.5bn of sukuk on September 18 after receiving bids valued at $8bn, with the dollar-denominated securities priced to yield 2.8 percent. Turkey has a Ba1 credit rating from Moody’s Investors Service, one level below investment grade, with a positive outlook.

Moody’s downgraded South Africa’s credit rating by one step to Baa1, the third-lowest investment grade, on September 27, and kept its negative outlook on the nation’s debt. The agency cited the government’s inability to deal with economic and political challenges, and decreasing fiscal and monetary policy space to spur the economy, as reasons for the change.

The government and its state-owned enterprises plan to spend R845bn on infrastructure projects until 2015. These include R300bn allocated to energy, R262bn on transport and logistics and R75bn to water, including Trans-Caledon’s projects, to boost economic growth.

Transnet might consider issuing Samurai bonds or Islamic debt to diversify its funding, chief executive Brian Molefe said in May. Samurai bonds are yen-denominated securities sold in Japan by overseas borrowers. Eskom is in talks with the National Treasury about issuing an Islamic bond, finance director Paul O’Flaherty said earlier. The National Treasury is reviewing legislation that prevents the sale of asset-backed securities needed for sukuk issues.

The yield on Trans-Caledon 9 percent bonds due in May 2017 rose 9 basis points to 6.44 percent on Monday, according to data based on exchange pricing. The extra yield investors demand to hold the utility’s debt over similarly dated government notes widened 2 basis points to 54 points.

Trans-Caledon would look at the sale of bonds and loans from export credit agencies as other options to fund its two biggest projects over the next five years, Mbele said.

The utility would need an “initial amount” of R11bn to fund the second phase of the Lesotho Highlands Water Project, Africa’s second-largest civil engineering development, Mbele said last month.

The money will be used to construct a dam wall and dig tunnels to transfer water to South Africa.

An additional R15bn would be needed to supply water to a new Eskom power plant, Mbele said, adding that the figures were provisional as tenders were awaited for the projects.

Trans-Caledon typically signed off-take agreements with water users, such as the Rand Water Board, Eskom and Sasol, the largest producer of liquid fuel from coal, and the projects repaid themselves within 20 years, she said.

“We ring-fence every project for which we raise money in the credit market,” Mbele said. “Each project has to repay its debt on its own.”

Standard Bank and BNP Paribas are among six companies that have been hired to advise on the government’s sukuk issue. South Africa expected to complete the sale this fiscal year, which ends next March, Thuto Shomang, the head of asset and liability management in the Treasury, said.

“The team is hard at work to ensure that we issue a successful debut sukuk,” Tshepiso Moahloli, a senior analyst in the Treasury, said. “Unlike a conventional bond, sukuk is much more complex than that and it requires certain provisions to be in place.”

Trans-Caledon would decide on the type of funding it would use once it had an indication of what kind of government guarantees it could get on the debt, Mbele said.

All of the state-owned enterprise’s R14.4bn of bonds and loans are state-backed and not rated by the main agencies.

South African dollar bonds have returned 10.1 percent this year, the ninth-biggest gain among 28 sovereign markets in JPMorgan’s EMBI plus index. Global sukuk have returned 7.5 percent, the HSBC/Nasdaq Dubai US Dollar Sukuk index shows.

“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. – Bloomberg