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Friday, September 30, 2022

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Indonesia’s green retail Sukuk: First of its kind

The world’s most populous Islamic nation recently reinforced its status as a leader in the sovereign green Sukuk market while attracting a new generation of investors with its first-ever green retail Sukuk.

Indonesia’s IDR1.46 trillion (US$104.1 million), two-year Green Retail Sukuk ST006 offered a 6.75% floating rate (with floor) coupon with a fixed spread of 175bps and was traded online to attract younger investors. The issuance welcomed 7,735 investors (2,908 new and more than 51% of the total were millennials), with an order volume of IDR189 million (US$13,476.3) per investor.

“The demand is quite big; it shows the millennial generation’s interest in investing in Islamic government securities. This is what the government expects to increase financial inclusion, especially from the millennials,” a representative from the Indonesian Ministry of Finance’s Directorate of Islamic Financing told IFN.

The issuance of the green retail Sukuk facility – structured under the Wakalah concept – was in collaboration with 23 partners including Bank Central Asia, HSBC Indonesia, Bank Mandiri, Bank Negara Indonesia, PermataBank, Modalku, Danareksa Sekuritas and Investree. Proceeds from the Sukuk will be used to finance and refinance environmentally friendly projects, targeting five areas of the global Sustainable Development Goals (SDGs) such as innovation and infrastructure, clean and affordable energy, and sustainable communities.

The Directorate of Islamic Financing said there were three main reasons why they chose an Islamic issuance over a conventional one. The first is the similarity of issuance structure, as the Green Bond/Sukuk Framework requires underlying assets, just as Islamic government securities do to ensure Shariah compliance. Another reason is legal – Law Number 19/2008 on Islamic Government Securities stipulates that Islamic government securities be issued for budget financing that includes project financing, whereas Law Number 24/2002 on Government Securities (conventional) do not regulate that conventional bonds be used for project financing.

The third reason – a compelling one – is that the country has had substantial experience in issuing green Sukuk, having done so in the global market in 2018 and 2019. This time around, leveraging on this past experience, the Indonesian government is tapping the domestic market with a green retail Sukuk, a unique issuance and the first of its kind.

“The Green Retail Sukuk ST006 is unique in that it was issued using a green framework, in which the underlying assets are green projects already marked as Climate Budget Tagging in the national budget. The issuance will also follow the existing green framework mechanism, which includes green impact reporting.”

The issuance was not without challenges – the green retail Sukuk paper was issued with the slowdown of the global economy in the background, with central banks including Bank Indonesia (BI) cutting rates up to four times since the start of 2019.

“The return for retail government Sukuk therefore tends to also be lower, as the BI rate is used as the reference rate. The government had to then transform the key message while marketing the retail green Sukuk, from return-oriented only to green and sustainable issues, encouraging investors to buy green Sukuk to contribute to combating the impact of climate change,” the directorate said.

ST006 Green Retail Sukuk
IDR1.46 trillion

26th November 2019
IssuerThe Republic of Indonesia, through Perusahaan Penerbit SBSN as the SPV
ObligorThe Republic of Indonesia
Size of issueIDR1.46 trillion
Mode of issueBookbuilding through distribution channels (selling agents)
PurposeFinancing/refinancing green projects/assets
TenorTwo years
Issuance price100%
Profit rate6.75% floating with floor (175bps fixed spread to BI 7-DRRR)
PaymentBullet
CurrencyIndonesian rupiah
Maturity date10th November 2021
BookrunnersDistribution channels: 15 banks, three securities houses, five fintech companies
Face value / minimum investmentIDR1 million (US$71.3)
Governing lawLaw number 19/2008 on Islamic government securities
Shariah advisorNational Sharia Board (DSN-MUI)
StructureWakalah
TradabilityNon-tradable
Investor breakdownResident individual investors, total 7,735 investors
Underlying assetsEligible green projects under the state budget

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