Nigerian DMO Completes Sixth Road Infrastructure Ring-fenced Domestic Sovereign Sukuk Ijarah Raising ₦350bn (US$460m) Amidst Robust Investor Over-subscription
The Federal Government of Nigeria (FGN) continued to build up a yield curve for its naira-denominated FGN Sovereign Domestic Sukuk with its sixth offering to date on 11th October 2023– a ₦350 billion (US$460 million) Sukuk Forward Ijarah linked to road infrastructure development.
This latest transaction issued by the Debt Management Office (DMO) of the Nigerian Ministry of Finance was originally aimed at an initial offering of ₦150 billion, but according to the DMO “was upsized to ₦350 billion due to the 435% oversubscription by investors which reached ₦652.827 billion. The level of subscription is evidence of investors’ confidence in the use and impact of Sukuk in the construction and rehabilitation of road infrastructure across the country.”
The proceeds of the 2023 Sovereign Sukuk, like the previous Sukuk issuances, will be used solely for the construction and rehabilitation of key road overseen by the Federal Ministry of Works and Housing and the Federal Capital Territory Administration.
The DMO’s Sukuk issuance strategy is unique in that it is entirely focused on financing the rehabilitation and reconstruction of key road projects across the six geopolitical zones and the Federal Capital Territory. This strategy for various reasons could be evolved as a model for other countries – both in developed and developing economies.
According to the G20 and World Bank Sukuk are particularly suited to fund infrastructure projects although in recent years banks and corporates have resorted to Sukuk to boost Tier I and II capital under Basle requirements, refinancing existing more expensive conventional debt and for balance sheet purposes.
According to the DMO, the ₦350 billion October offering “was well received by a diverse group of investors which shows that the level of awareness of the product has increased and that investors are willing to support the financing of infrastructure. The DMO remains committed to meeting the needs of investors while also supporting the development of the domestic capital market.”
This latest Sukuk issuance was in fact preceded by what the DMO calls a wide public sensitization to encourage subscription from diverse investors, particularly retail investors. “Invest in the 2023 Sovereign Sukuk. ₦742.557 Billion Raised and Deployed to the Rehabilitation and Construction of 4,000 Kilometres of Roads and Bridges. Your Investment a Catalyst for Growth and Development,” read the DMO flyer marketing the issuance and inviting both Nigerian institutional and retail investors to participate.
They rose to the call for investment because the issuance attracted a robust 435% oversubscription, with the order book reaching ₦652.827 billion (US$850 million), which prompted the upsizing. The DMO also organised an Investors’ Meeting for the 2023 Sovereign Sukuk Issuance in Abuja on 5th October 2023.
The 10-year Sukuk were issued on 3rd October 2023 through FGN Roads Sukuk Company 1 PLC on behalf of the obligor, the Federal Government of Nigeria, and was priced on the closing date of 11th October 2023 at a fixed rental rate of 15.75% per annum payable half yearly. The certificates have a maturity on 12th October 2033.
Prior to this issuance, the DMO last issued a ₦130 billion (US$280 million) Sukuk Forward Ijarah linked to road infrastructure development on 2nd December 2022, which was priced at a fixed rental rate of 15.64% per annum payable half yearly and matures on 1st December 2032.
This latest transaction involved a wide range of Nigerian financial institutions and was jointly lead managed by Greenwich Merchant Bank Limited; Stanbic IBTC Capital Limited, a member of South Africa’s Standard Bank Group; and Vetiva Capital Management Limited. They together with Buraq Capital Limited also acted as issuing houses and adviser to the transaction.
Stanbic IBTC Bank Plc, Jaiz Bank Plc, Lotus Bank Ltd, Sterling Bank Plc, Taj Bank Ltd, Zenith Bank Plc and Greenwich Merchant Bank Ltd acted as receiving banks
Demand for FGN domestic Sukuk offerings has been robust since the inaugural issuance in 2017. The ₦250 billion Sukuk transaction in 2021, for instance attracted an “unprecedented subscription level of over ₦865 billion (US$2.09 billion),” which means the issuance was oversubscribed by 346%. The average subscription for the six Sukuk issuances between 2017-2023 is ₦431.64 billion (US$560 million) for an average ₦182.09 billion (US$240 million) offering with an average tenor at 8.3 years.
Thus far in the period 2017 to 2023, the DMO has issued sixth domestic sovereign Sukuk totalling ₦1,092.557 billion (US$1.43 billion).
The DMO is buoyed by the diverse number of investors (retail investors, banks, Pension Fund Administrators, asset/fund managers, insurances companies, ethical funds, Takaful operators/non-interest banks, stockbrokers, Government agencies, High Net Worth Individuals, Trustees and Unit Trusts) who supported the Federal Government’s infrastructure development efforts through Sukuk financing.
“The strong participation of retail investors, ethical funds and non-interest financial institutions in this Sukuk Offering,” stressed the DMO, “attest to the fact that the Government’s objective of promoting financial inclusion through admitting more retail investors and ethical funds into the financial system is being achieved.”
The DMO has in the past maintained that it “will work to sustain the laudable achievements recorded so far in the use of Sukuk Issue proceeds for the construction and rehabilitation of Nigerian roads, and thereby, continue to enhance ease of commuting and doing business, safety on our roads, job creation, economic growth, and the prosperity of our nation.”
According to Patience Oniha, Director of General of the DMO, the FGN Sukuk embodies two key sustainability features – infrastructure and financial inclusion. “We consider Sukuk to be one of the useful and accepted products for raising funds,” she explained. “The proceeds from the issuance will be used solely for the construction and rehabilitation of 44 arterial roads across the six geopolitical zones of the country. Issuing further Sukuk in 2023, will depend on eligible projects in the 2023 Appropriation Act.”
The Sukuk certificates, which are guaranteed by the government, are available to both institutional and retail investors. The journey of retail investors is revealing – 5% for the debut issuance in 2017, followed by 17.33% for the second issuance in 2018, to over 18% for the third issuance in 2020.
The increasing level of participation by a more diverse and larger number of investors, stressed the DMO, “is a confirmation that the DMO’s objectives of issuing sovereign Sukuk to grow the domestic investor base and promote financial inclusion is being achieved. In addition, the high subscription level is proof of investors’ acknowledgement of the impact the first three Sukuk issuances totalling N362.577 billion (US$880 million) issued between 2017 and 2020 has had on the development of road infrastructure in Nigeria.”
According to Oniha, sovereign Sukuk diversifies the product range available to investors in the domestic financial market, widens the investor base and promotes financial inclusion by attracting several first-time retail investors.
According to the DMO, FGN Sukuk IV has several sustainability and ethical attributes. These include responsible investing (the proceeds are dedicated to tangible road infrastructure projects; financial inclusion for non-interest investors with the aim also of further developing the savings culture in Nigeria; ethical investment for investors who are ethically minded; low risk as the certificates are guaranteed by the FGN and certified by the Financial Regulation Advisory Council of Experts (FRACE) of the Central Bank of Nigeria; liquidity since the certificates can be traded on the two top local stock exchanges and qualify as liquid assets for banks and other institutions; and the Sukuk certificates may be used as collateral for securing credit facilities from financial institutions.
The certificates also qualify as government securities within the meaning of Company Income Tax and Personal Income Tax for Tax Exemption for Pension Funds amongst other investors; and as securities in which trustees can invest under the Trustee Investment Act.
The Sukuk certificates are listed on the FMDQ Securities Exchange, Nigeria’s largest bourse, and the Nigerian Exchange Limited. With the listing, Sukuk certificate holders can trade them while new investors have an opportunity to buy the certificates in the secondary market, thus unlocking vital liquidity in the capital market.
The development impact of Sukuk is clearly visible – improved road infrastructure within and outside Nigerian cities, timely completion of designated projects and the multiplier effects associated with construction of capital projects such as roads.
This, says the DMO, has brought reprieve to road users, improved travel times between major commercial cities, linked borrowing and government expenditure to specific critical projects, helped increase the flow of cargo and passenger traffic across major cities, and improved infrastructure delivery across the country.
The impact of the sovereign Sukuk on road infrastructure in terms of job creation, travel time, safety and movement of goods have made the Sukuk a beneficial financial instrument for financing economic growth and development.
