Air Selangor priced its ‘Sukuk Kelestarian’ SRI Sukuk worth RM1 billion (US$214.68 million) on the 11th October 2023, which was the issuers largest sustainable issuance to date. ISFI spoke to Kevin Lee Shih-Min, the head of finance and strategy at Air Selangor, about this issuance and the future direction of Air Selangor’s Sukuk strategy. Non-SRI Sukuk is out, Kevin shared.
This facility is the sixth tranche under its existing RM10 billion (US$2.15 billion) Sukuk Murabahah program. The offering was upsized from its initial issuance target of RM700 million (US$150.23 million), receiving RM3.6 billion (US$772.86 million) in subscriptions. The five-series facility carries tenures ranging from seven to 25 years.
According to Kevin, the bulk of the proceeds from the issuance will be channeled toward building new treatment plants. It will also contribute to the rehabilitation of its existing treatment plants, with a substantial portion of the proceeds going toward replacing its pipes.
Due to the relatively longer tenure of the facilities, Kevin shared that the issuance primarily saw demand from financial institutions and insurance companies, constituting roughly 70% of the participation in the Sukuk with some fund managers comprising the remainder.
Elaborating on the positive response from the market, Kevin opines that a combination of both optimal timing and the market warming to sustainable capital market instruments were the primary contributors.
“Timing wise, there was a space in October where I think there were less [sic] issuers going into the market at that stage… And even then, I think since we started our bond program in 2020, we have noticed a shift from just normal Sukuk demand from investors to SRI-compliant Sukuk,” Kevin shared.
According to Kevin, when Air Selangor went to the market in October, there were only two or three other issuers tapping the market and they were largely non-SRI compliant issuers. As such, not only was there an SRI Sukuk vacuum, but there was also a broader demand for Sukuk in general that was not being met at the time.
The RM 1 billion Sukuk was initially slated to be issued in September 2023. According to Kevin, Air Selangor was holding out its issuance to see if the US Federal Reserves would announce another interest rate hike.
“When there was no change in the [interest] rate, we immediately went to the market,” Kevin explained.
Kevin shared that when Air Selangor first established its Sukuk program in 2020, it was hoping that having an SRI provision in the program would allow it to drive the cost of financing down in the future. With the changes in the landscape, it has managed to do that at a price differential in the range of 10—20bps.
While the water utilities company is not new to the Islamic capital market or the smaller niche of the Islamic sustainable capital market, its 2023 issuances represent a step in a new direction for the company, constituting the first time it has issued pure SRI issuances. In the past, its facilities featured both vanilla and SRI Sukuk tranches.
“In 2020 when we first tapped the market, the investors were a little bit more indifferent in terms of whether the issuances were SRI-compliant or not, but these days, especially in the last two times we went to the market, there’s a clear indication that SRI-compliant is preferred.”
Kevin shared that all of Air Selangor’s projects are sustainable in nature, as such its non-sustainable Sukuk issued in the past also were channeled toward funding sustainable projects.
The decision to issue non-SRI Sukuk in the past was due to the lack of sensitivity of the market to labelled issuances and not the lack of sustainable projects from the part of Air Selangor.
According to Kevin, Air Selangor’s days of issuing non-SRI Sukuk may be behind them.
“From this year onward, we have tried to just issue SRI-compliant Sukuk so that we eventually phase out non-SRI Sukuk…
We hope to keep this momentum going for the following years and stop issuing non-SRI Sukuk in the future,” Kevin projected.
In 2024, Air Selangor will be targeting a Sukuk issuance size of around RM1 billion through two market taps. Ultimately, the sizing of the issuances for the year will be dependent on Air Selangor’s projected cash requirements, Kevin caveated.
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Air Selangor’s 6th SRI Sukuk RM1 billion (US$214.68 million)  11th October 2023 |
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| Summary of terms and conditions | |
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Issuer |
|
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Size of issue |
RM1 billion (US$214.68 million) |
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Mode of issue |
Book building, bought deal, private placement |
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Purpose |
To finance the building of new treatment plants. |
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Tenor |
Five – 25 years. |
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Profit rate |
4.4 – 5% |
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Payment |
Semi annual |
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Currency |
Malaysian ringgit |
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Maturity date |
9th October 2048 |
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Lead arranger(s) |
Bank Islam Malaysia |
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Principal advisor(s) |
Bank Islam Malaysia |
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Governing law |
Malaysian law |
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Legal advisor(s)/council |
Shook Lin & Bok |
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Islamic structure |
Murabahah via Tawarruq arrangement |
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Listing |
No |
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Underlying asset |
Shariah compliant assets |
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Rating |
‘AAA’ by RAM Ratings |
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Shariah advisor(s) |
Bank Islam Malaysia |
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Tradability |
Yes |
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Investor breakdown |
Financial institutions, insurance companies fund managers. |