Sukuk with contractor profitability: VEB identifies a base of 1.24 billion for Islamic securities

Investors snapped up 84.35% of the debut sukuk issue

VEB.RF conducted its debut placement of partnership bonds (sukuk) in late May and early June. At that time, the debt market began to revive after the key rate was cut to 14.5% per annum in April. The start of accepting applications for the purchase of exchange-traded bonds was announced on April 29. Within a week, the entire announced issue volume of 3.53 billion rubles was bought out, the VEB.RF press service reported. The yield to maturity on the securities was 15.35%, with a maturity period of 739 days (redemption will take place on June 5, 2028).

Given the novelty of partnership bonds, the placement took place in a book-building format, Renat Yedikhanov, General Director of AS-Salyam, whose company acted as a consultant for the pilot issue, told Realnoe Vremya.

According to him, before the placement began, the organizers opened an order book for the purchase of bonds to determine their effective cost.

— The determination of the securities' yield was not formed in the classical way, that is, not linked to the market value of money, which depends on the Central Bank's rate, but according to the principle of a share in the project's profit. Initially, VEB.RF offered investors a share of no more than 85% (This is 75% of the total issue volume, while the remaining 25% was to remain at the disposal of the Group — editor's note). However, demand for Islamic bonds turned out to be higher than forecast. As a result, investors bought 84.35% of the total issue volume, — he said.

How the yield of Islamic securities was reduced

Investors submitted applications totalling over 9.3 billion rubles, which exceeded the offered placement volume by more than 2.5 times, the VEB.RF press service clarified after the completion of the buyback process. High investor interest made it possible to twice reduce the indicative calculated yield during the book-building process by 15 basis points to 15.35% (the initial yield indicator was 15.5% — editor's note). According to the offer, payments must be made quarterly for over two years (8 coupon payments in total). The compliance of the transaction structure with Sharia standards has been confirmed by the opinions of a certified AAOIFI expert, VEB.RF noted.

Banks, management companies, and investors from friendly foreign jurisdictions participated in the placement, the Group's statement notes. The organizers do not name foreign investors. But it is no secret that such securities are most often purchased by Arab funds from the Gulf countries, investors from Malaysia, Indonesia, and other Asian countries where this instrument is widely used.

The yield to maturity of 15.35% turned out to be almost 1% higher than the current key rate level, and over a two-year horizon the difference may be even greater. Are such loans beneficial? According to Renat Yedikhanov, each participant in the placement was satisfied with the results of the debut sukuk issue. Currently, rates on classic bonds with a two-year term range from 19.5 to 22% per annum.

True, the head of AS-Salyam does not rule out that the redemption of the partnership bonds may occur six months early. This means that the issuer will be able to reduce its servicing costs.

Why the sukuk was “cut” to 3.5 billion rubles

VEB became the first government entity to place Sharia-compliant bonds with a fixed yield. Its issue is structured according to a special model — sukuk al-mudaraba. The essence of such securities is the issuer raising capital and transferring funds under a mudaraba agreement to those in need of money, according to the opinion of certified Sharia advisor of CSAA and AAOIFI expert Bulat Mulyukov.

— In this case, VEB.RF acted as an issuer in the public borrowing market, and the funds it raised, 3.53 billion rubles, will be transferred by it under a loan agreement to Alabuga Development LLC for the construction of a production building in the Severnye Vorota industrial park in Kazan, — explained Renat Yedikhanov.

Plans for a pilot sukuk issue in the interests of constructing the Severnye Vorota industrial park became known in January of this year. Then, the head of the Investment Development Agency of Tatarstan (AID RT), Taliya Minullina, announced the placement of a 5 billion ruble issue.

— We are issuing sukuk for the first time. The deal is structured according to Sharia principles. This is a precedent for Russia! — she said, speaking at the annual board meeting of the agency. Why was the amount smaller? According to Renat Yedikhanov, the cost of constructing the building has not changed and remains 5 billion rubles. But the developer decided to attract two-thirds of the necessary capital.

A delta of 1.24 billion rubles

However, the intrigue lay not in the scale of the issue, but in how VEB.RF would pay income to investors. Unlike classic bonds, where interest income is accrued, Sharia prohibits receiving benefit without performing labor in the broad sense. An investor has the right to receive income from investing in an asset, not from repayment of debt. These subtleties changed the approach to issuing sukuk: how to calculate the income base for paying coupons on bonds.

Following this philosophy, VEB will pay coupon income from the margin that Alabuga Development receives during the construction of the building, Renat Yedikhanov clarified. Its customer is Severnye Vorota JSC. It pays for the work of Alabuga Development LLC, and the income is formed from this revenue. “The income base (of the contractor) is no less than 1.24 billion rubles," according to VEB.RF's decision on the issue of partnership bonds for the Moscow Exchange.

True, there is a stipulation that this indicator is variable but cannot fall below. Under the terms, Severnye Vorota Management Company will act as the customer for the construction, and Alabuga Development LLC as the contractor (both are controlled by the Management Company of Industrial and Production Zone Alabuga Special Economic Zone). Accordingly, the construction contract includes a margin, he noted.

Of course, the scheme is complex, with many transfers, but the conditions for investors are no worse than for classic bonds. This is partly likely due to the lack of placement standards in the Russian Federation. The head of the State Duma Budget Committee, Anatoly Aksakov, is working on their approval with the Central Bank, but so far progress has been slow.

— If you open economics textbooks, foreign investment is an integral factor in the development of any state. Under current conditions, issuing Eurobonds has become impossible. However, sukuk, despite being at a formative stage in Russia, represents a real opportunity. This is effectively the first market issue of this instrument, which is a significant achievement. It is important that the quasi-public sector can also participate in such emissions. In this context, VEB, being a state corporation and essentially a primary derivative of the Russian Federation, acted as an issuer with a high level of trust and set a precedent, — concluded Renat Yedikhanov.