South Africa Sells Islamic Bonds at Record-Low Borrowing Cost

South Africa sold its first ever Shariah-compliant bonds at a record-low borrowing cost, opening the way for state-owned companies to tap a growing Muslim investor base.

The $500 million of 5.75-year securities were priced with a coupon of 3.9 percent, at the bottom end of the range marketed to asset managers, according to a statement from the National Treasury. That’s the lowest rate out of 14 dollar bonds issued since 1994, according to data compiled by Bloomberg. Fifty-nine percent of investors participating in the deal were from the Middle East, the statement said.

The sale is likely to prompt more African nations and companies to follow, according to Linklaters LLP, a London-based law firm that advised the U.K. government on its sukuk sale in June, the first by a non-Muslim nation. Eskom Holdings SOC Ltd., South Africa’s state-owned electricity company, and Transnet SOC Ltd., the ports and railways operator, have said they may tap the Islamic finance market.

“The investor distribution represents a resounding success in building a more diversified investor base for South Africa,” the National Treasury said in a statement.

BNP Paribas SA, KFH Investment and Standard Bank Group Ltd. arranged the sale, which followed investor meetings in Asia, the Middle East and Europe.

Nigeria, Kenya

Global sovereign Islamic-bond issuance will increase 30 percent in 2014 to $30 billion, led by emerging-market sales, according to Moody’s Investors Service. Hong Kong and Indonesia sold sukuk in recent weeks and Luxembourg mandated banks to arrange an offering. Nigeria and Kenya are among African countries considering sukuk sales.

“The South African sovereign sukuk represents an important milestone for the development of Islamic finance in African markets,” Richard O’Callaghan, capital markets partner at Linklaters, said by e-mail from London. “Once sovereigns have demonstrated the viability of a local framework, showing there is a robust legal and tax system in place to allow deals to happen, it should pave the way for corporates to do something similar.”

Manama, Bahrain-based Al Baraka Banking Group said yesterday its South African subsidiary, Al Baraka Bank, is awaiting regulator approval to raise 300 million rand ($27 million) from the sale of 10-year Islamic-finance bonds in 2015.

South Africa raised $1 billion of 30-year bonds in July at a coupon of 5.375 percent. The yield was little changed yesterday at 5.26 percent. The lowest coupon on dollar-denominated debt before yesterday’s sukuk was the 4.665 percent the nation paid for $1.5 billion of 12-year bonds in January 2012.

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