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A Dangote sukuk in the offing?

Summary: After the success of two large government sukuks (bonds) it looks like the Dangote corporation is poised to issue its own Islamic instrument. By Mushtak Parker.

Nigeria, Africa's second-largest economy, is finally gaining traction in its sukuk issuance ambitions. Following its two highly successful N100bn sovereign domestic sukuk (bond) issuances in 2017 and December 2018, the Debt Management Office (DMO), according to its Director General Patience Oniha, has confirmed that the government is actively working on issuing a third sovereign sukuk.

This is for the financing of some infrastructure projects approved in the 2019 budget, and there is a possibility that the size could be N200bn ($550m) but it depends on whether the market is ready to absorb the amount.

The aim is to get the issuance to market before the end of 2019, with the possibility also of issuing the country's debut sovereign sukuk in the international market, most likely a US dollar issuance.

However, it is in the corporate sector that a potential game-changer is unfolding. Two of the country's largest industrial entities, Dangote Sugar Refinery Plc and Dangote Cement, are both poised to go to the market for their maiden sukuk.

Dangote Sugar, according to local financial sources, has instructed banks and law firms to structure its debut sukuk which will be a benchmark $500m in the international market.

The proceeds of the sukuk will be used towards financing the company's backward integration projects, which include 'the Sugar for Nigeria' project, which aims to produce up to two million tonnes of refined sugar annually. Dangote Sugar is an integral part of the Federal Government of Nigeria's National Sugar Development Master Plan.

According to local banking sources, the structure of the Dangote Sugar sukuk would use a hybrid ijara (leasing) and tawarruq (commodity) murabaha (cost-plus financing) structure, which is popular in the Middle East and Malaysia.

The choice of structure is important because it can be a barrier to entry for new sukuk issuers. According to Attahiru Maccido, a director of Buraq Capital, "If it is an asset-backed or asset-based sukuk, many potential issuers including government agencies and corporates are reluctant to allocate the required asset pool for securitisation.

"These organisations do not want to sell or lease their assets to a special purpose vehicle which issues the sukuk on behalf of the obligor (the guarantor and ultimate issuer). This is because of political will and misconceptions about the use of the asset pool which is for the duration of the tenor until maturity, after which the ownership reverts to the original owner." Maccido was involved in structuring the first two FGN sukuks when he was with Lotus Capital and is involved in the proposed third issuance.

The structure used for the two Nigerian government sukuks was an ijara mawsufah al-dhimmah (a forward lease), which involves the sale of a clearly specified underlying asset, which is currently being produced or constructed, for a future delivery.

In the case of the government sukuk it was a specified lot of arterial roads that were financed for rehabilitation or reconstruction from the sukuk proceeds. Under Securities & Exchange Commission of Nigeria (SEC) rules, there are 13 sukuk structures that have been approved.

Lack of suitable products

But the local sukuk market is affected by a lack of products to suit local requirements. This together with a six-month approval for sukuk issuance applications by the Securities & Exchange Commission of Nigeria and the fact that the Commission requires state government issuers of bonds and sukuk not to have a debt/revenue ratio of more than 50%.

The sukuk potential, says Maccido, is huge. "The Nigerian Pension Commission introduced new guidelines in 2018 to all pension fund administrators in Nigeria to create multi-funds investment portfolios including non-interest funds and sukuk to give people a choice.

"The Nigerian Pension Fund has assets under management of $25bn. With a Muslim population of just over a half, if at least 10% wanted to move to a non- interest investment portfolio, we are talking about $2.5bn of instruments needed to facilitate this," he added.

There is the enticing prospect of issuing sukuk like diaspora bonds to attract investment from Nigerians abroad interested in such products. ua

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Publication:African Banker
Geographic Code:6NIGR
Date:Aug 5, 2019
Previous Article:Public finance in Africa: end of easy money.

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