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Monday, October 2, 2023

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PODCAST: A case study on Kayseri Seker’s innovative crystal sugar Sukuk

Turkiye’s largest beet growers cooperative brand Kayseri Seker raised TRY85 million (US$4.44 million) through Sukuk issued via Halk Investment’s SPV on the 2nd February 2022. ISFI spoke to Dr Menevse Ozdemir Diliduzgun, the head of corporate finance and advisory at Halk Investment, and Ozgun Ozok, the managing partner of Ozok Law Firm, the legal advisor of the Sukuk, to learn more about this deal.

The Sukuk facility, which was participated by 18 qualified investors comprising 16 institutional investors and two individual investors, was the first Sukuk to use a quota of crystal sugar as an underlying asset and was also the first Sukuk issued by a cooperative in Turkiye. The innovative structure of the Sukuk won it the title of IFN’s 2022 Most Innovative Deal of the Year.

“The parties opted to use crystal sugar [as the underlying asset] to eliminate the risk of production … We eliminate the risk of sale of the underlying asset as this is a regulated market and the production is planned and licensed by the Ministry of Agricultural Trade Quota System,” Ozgun told ISFI.

Due to the regulated nature of the crystal sugar market, Ozgun explained that the parties are assured that the crystal sugar that Kayseri Seker produces will be sold in the market.

One of the main challenges of structuring agricultural Sukuk is the mismatch between the maturity of the funding and the agricultural lifecycle. Movable pledge and account pledge agreements were included in the Sukuk structure to address this issue.

This allowed the cooperative to use the asset portfolio belonging to the SPV during the term of the Sukuk, enabling Kayseri Seker to sell the crystal sugar and the SPV to monitor the process. The cooperative used the Sukuk proceeds as advanced funding for the next sugar beet harvest while it uses the stock that has not been sold to a third party as the underlying asset.

This created further collateral for the lag between the maturity of the funding and the agricultural lifecycle. It also contributed to lowering the cost of funding as it made the instrument more attractive to investors.

With this arrangement, Sukukholders will have the opportunity to sell the underlying asset should a default occur while allowing the company to manage its operations without any interruptions from the SPV, Ozgun elaborated.

The nature of the agricultural business is such that capital market instruments to fund the sector are generally short-term, with the Sukuk in question having a tenor of 84 days. While the agricultural lifecycle contributes to the short-term nature of agricultural Sukuk, Dr Menevse noted that due to the turbulent capital market landscape in Turkiye, short-term Sukuk are the norm.

“In Turkiye, Sukuk are mostly demanded by institutional investors like mutual funds and pension funds and the pricing actually is made according to the fixed rate of return determined in line with the market dynamics… The expectations of investors and the fund users are being met. There is an equilibrium point in the market,” Dr Menevse explained.

Kayseri Seker, which owns three sugar factories and has 16% of the total crystal sugar quota in Turkiye, has issued approximately US$53 million-worth of Sukuk via the Halk Invest SPV since 2019 through 11 issuances and is not stopping anytime soon. It is set to raise TRY100 million (US$5.22 million) in May this year.

This is an excerpt from an interview with Dr Menevse Ozdemir Diliduzgun and Ozgun Ozok from Halk Investment. Listen to the full discussion on IFN OnAir.

Kayseri Seker’s February 2022 Sukuk

TRY85 million (US$4.44 million)

2nd February 2022
Summary of terms and conditions
Halk Varlik Kiralama
Kayseri Seker
Size of issue
TRY85 million (US$4.44 million)
For the company’s purchase of sugar beet, sugar production and management and sale of sugar stocks, increasing sales revenues and providing financial expenses related to these stocks.
84 days
Profit rate
19.9% annual simple return
One coupon payment at maturity
Turkish lira
Maturity date
27th April 2022
Lead manager(s)
Halk Invest
Principal advisor(s)
ISFA Islamic Finance
Halk Invest
Governing law
Turkish law
Legal advisor(s)/council
Ozok Law Firm
Islamic structure
Wakalah Bi Istithmar
Underlying asset
A quota of beet sugar to 120% of issuance amount
Shariah advisor(s)
ISFA Islamic Finance
Yes, on Borsa Istanbul
Investor breakdown
18 investors participated consisting of 16 qualified institutional investors and two qualified individual investors

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