The role of sukuk in financing the halal food industry

The volume of sukuk from food and beverage companies is historically low, especially relative to the size and frequency of issues of corporate bonds by leading multinational food and beverage companies, and considering the strong purpose that sukuk serves in helping halal companies expand their asset base. What are the opportunities for halal food companies to raise capital via sukuk?

CONVENTIONAL CORPORATE BONDS

Conventional corporate bonds are fixed income debt securities issued by corporations to investors. Corporations requiring financing borrow funds from investors, and repay the loan at a variable or fixed interest rate in installments and as a lump sum at a future date. $3.3 trillion of corporate bonds (pdf) were issued globally in 2015—down 6 percent from $3.5 trillion in 2014. 88 percent, equivalent to $2.9 trillion, were investment grade (those with little risk of default), with high-yield bonds (those with a higher risk of default) comprising the remaining 12 percent.

SUKUK

Due to their interest-bearing nature, conventional corporate bonds are not Shariah-compliant. Instead of interest-bearing debt obligations for investors, sukuk represent shares of ownership in a tangible, underlying asset. They take on different structures depending on the nature of the assets they are financing; wakalah and murabahah are the most preferred structures, followed by ijarah, mudarabah, musharakah, hybrid, and others.

Sukuk is often referred to as a fixed income instrument (likened to conventional bonds) but there have been cases when the instrument can be quasi-fixed, such as exchangeable sukuk, or other unique structures such as contingent convertible (CoCo) sukuk, SRI sukuk, or some other type of hybrid structure.

The sukuk market only started gaining rapid momentum in the 2000s after the first issue in 1990. In 2001 the market was valued at just over $1 billion, growing to $139.2 billion in 2012, according to Thomson Reuters data. Issuances dropped significantly to $101.8 billion in 2014 and $66 billion in 2015, the latter largely attributed to cessation of short-term sukuk issuance by Bank Negara Malaysia.

In 2016, the sukuk market continued to struggle as a number of issuers shifted to bonds in search of liquidity. As of July 2016, sukuk issuances stood at $38.7 billion, just under the $40.9 billion in the same period in 2015. 

Corporate sukuk is a fraction of the overall market, which is dominated by sovereign and quasi-sovereign papers.

According to Thomson Reuters data, corporate sukuk made up 30 percent of all issuances as at the third quarter of 2015. Financial services were the biggest issuers, followed by the transport sector, construction, and oil and gas.

The F&B sector made up less than 1 percent of all sukuk issued up to Q3 2015.

F&B SUKUK

Corporate F&B sukuk is not a norm.

The only sukuk from the F&B sector in 2015 was the $426.8 million sale from Saudi Arabia’s Almarai.  

Almarai’s sukuk was issued to finance part of its 21 billion Saudi riyal capital investment program and its funding diversification. With a tenor of 7 years, the company’s September 2015 sukuk will invest 51 percent of its proceeds through an equity-based mudarabah structure in its business activities, while the other 49 percent are to be invested through a murabahah agreement. Lead managers and bookrunners of the sukuk included BNP Paribas Investment Company KSA, HSBC Saudi Arabia, Saudi Fransi Capital and Standard Chartered Capital Saudi Arabia.

Almarai is a familiar corporate sukuk issuer – the Gulf’s largest dairy firm went to market in 2012 with a 1 billion Saudi riyal issue, followed by a 1.3 billion riyal sale in 2013, both part of its 2.3 billion riyal sukuk program.

Fellow Saudi corporate Savola, an investment holding group in the food and retail sectors across the Middle East, North Africa and Turkey, issued its debut sukuk in 2013. It was a privately-placed 1 billion riyal ($400 million) sale that was the first tranche of its 5 billion riyal program.

Elsewhere, the United Kingdom-based Euro Quality Lambs is considering issuing sukuk to fund the building of its new integrated halal facility for slaughter, cutting, and value-added production. Discussing the company’s plans, Rizvan Khalid told Salaam Gateway, “The concept is for the site to become a showcase for religiously-slaughtered products for the whole of Europe whilst also incorporating food trends of social, environmental, and economic sustainability. We will be looking to issue corporate sukuk totalling between 10 and 20 million British pounds (between $15 million and $30 million) as our plans develop.”

F&B SUKUK CHALLENGES AND OPPORTUNITIES

Almarai’s 2015 sukuk was undersubscribed, with the company initially intending to achieve an issuance amount of $530 million. Moreover, the sukuk was the sole substantial F&B sector sukuk in 2015. Why this underwhelming performance in the F&B sector?

Sulaiman Moolla, an Islamic finance specialist and sukuk expert at Qatar’s Barwa Bank, believes this is down to a less mature market. “I think the important thing to note is that when markets mature, they give access to different types of opportunities. In the F&B space, there aren't many companies that prefer Islamic finance. Therefore the Islamic issuance space is relatively smaller than, for example, the issuance market for companies such as Pepsi or Coca Cola that regularly issue [bonds].”

As halal food companies expand and as corporates increasingly gain familiarity with sukuk, there is considerable opportunity to raise sukuk to finance capital expenditures and asset acquisition. This will also require sukuk arrangers to reach out to corporates to raise their awareness of their financing and funding options.

Crowdfunded ‘mini retail corporate sukuk’?

There is also the potential to make sukuk more accessible to smaller companies via crowdfunding platforms. This is, to date, an unexplored option and is rife with challenges, chief of which is the fact that crowdfunding is largely unregulated, especially in key Islamic economies. Malaysia last week became the first Southeast Asian nation to license crowdfunding platforms; one of the six licensed is Shariah-compliant Ethis Kapital, which targets SMEs.

With the increasing use of retail sukuk by sovereigns, first in Indonesia in 2009, followed by Malaysia, Pakistan, and Bahrain, on paper there is the potential to extend ‘mini retail corporate sukuk’ to Islamic crowdfunding sites. This could create efficient investment platforms that allow multiple investors to acquire an ownership stake in individual assets of halal F&B firms.

Again, this will require extensive education and awareness for the markets, as well as regulatory oversight to protect all counterparties: crowdfunding platform, issuer, and investor.

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