Savola Group’s SAR 1 billion sukuk issuance mainly aims to refinance its previous sukuk and reflects a desire to reduce its debt, the firm told Argaam in an exclusive interview.
Saudi Arabia's largest food producer has chosen to pay more than half the value of the issuance through an exchange with part of the previous sukuk, a move that allows current investors to exchange their holdings, while offering the sukuk to new investors.
Any new sukuk issuance will be studied – in terms of value or structure – in line with the group’s strategy and objectives, taking into account available investment opportunities, as well as the company’s dividend policy and assets.
Sukuk offerings will remain one of the multiple financing options, the firm said.
Here is the full interview with Savola Group:
Q: What is the size of Savola Group’s debt?
A: As posted on Tadawul, Q1 2019 financial statements showed nearly SAR 8 billion in debts, of which SAR 1.5 billion are in the form of sukuk, while the remaining amount is made up of long and short term loans.
Net debt stands at around SAR 7 billion, based on the previously mentioned results.
Q: How the recent SAR 1 billion sukuk issuance would affect the firm’s debt?
A: First and foremost, the company has strong internal mechanisms to monitor debt and plan for any financial needs. Savola operates in more than nine countries, with banking facilities on the parent company level as well as the other subsidiaries. The group’s treasury manages the liquidity of all the Saudi-based affiliates on a daily basis.
Savola Group’s debt-to-equity did not exceed 1.05x by the end of Q1 2019, taking into consideration that financial statements only reflect the book value of the firm’s listed investments, not the market value.
Secondly, this sukuk issuance mainly aims to refinance the previous sukuk, which was worth SAR 1.5 billion, while the new sukuk amounts to SAR 1 billion, although orders could have allowed higher issue value. This reflects the firm’s desire to reduce debt.
Q: Why did the company exchange SAR 507 million of the sukuk with the previous Islamic bonds? Will the latter mature soon?
A: The Islamic bond exchange offer allows current investors to exchange their existing sukuk with the new ones, and new investors to take part in the offering. The previously issued sukuk will mature in January.
Q: What is the value of the sukuk nearing maturity?
A: They stand at SAR 1.5 billion, however, SAR 507 million worth of sukuk were exchanged with the new issuance and the remaining SAR 993 million will be repaid on the due date.
Q: Does the company intend to issue new debt in the foreseeable future? Will it use the sukuk exchange method again?
A: The firm established a sukuk issuance program worth up to SAR 5.3 billion. Accordingly, any new sukuk issuance will be studied – in terms of value or structure – in line with the group’s strategy and objectives. This will take into account the available investment opportunities, as well as the company’s dividend policy and assets.
We seek to keep sukuk offerings as part of the multiple financing options of the company, hence we were keen to refinance the previous sukuk with the new one and did not seek direct financing from banks. The company had over SAR 4.48 billion worth of available financing channels by the end of March 2019.
Q: How did the change in interest rates impact the company’s debt? Was this the reason behind choosing sukuk instead of bank loans?
A: The increase in the Saudi Arabian Interbank Offered Rate (SAIBOR) is known to have a negative impact on financing charges in general. The sukuk issuance is part of the firm’s goals to diversify financing resources in order to offset the cost of finance on the long run, and increase value to shareholders. In addition, the sukuk helps the company leverage on various investors wishing to allocate part of their portfolios to fixed-income instruments such as sukuk.
Q: Following this issuance, will Savola have two outstanding sukuk issuances?
A: As stated on Tadawul, SAR 507 million were exchanged with the previous sukuk, cutting its remaining value from SAR 1.5 billion to SAR 993 million that matures in January. The new SAR 1 billion issuance matures in July 2026.
Savola sukuk targeted new investors: HSBC
HSBC Saudi Arabia, lead manager of Savola Group’s SAR 1 billion sukuk issuance, said that the sukuk exchange offer is one of the professional debt management methods, adding that existing investors had the choice between exchanging all or part of their holdings, or maintaining their investments unchanged.
The sukuk was also structured to attract new investors, the lender told Argaam in an exclusive interview.
Savola Group had appointed HSBC Saudi Arabia as its lead manager for the SAR 1 billion sukuk offering, including the sukuk exchange offer.
The Islamic bond exchange was offered at a 1:1 basis, without any change to the previous sukuk value, the lead manager said.
The exchange process required extraordinary efforts to coordinate between the Capital Market Authority (CMA), legal consultants, Sharia authorities, investors, Securities Depository Center (Edaa), issuing firms, and other related agencies.
Here is the full interview with HSBC Saudi Arabia
Q: What were the conditions of the sukuk exchange offer?
A: The exchange pricing was set at 1:1, without any change from the previous sukuk. The new offering has a seven-year maturity, just as the previous one, with investors offered a profit rate equivalent to 160 basis points (bps) over SAIBOR, compared to 110 bps over SAIBOR for the debut sukuk. The remaining conditions are disclosed on Tadawul.
Q: Generally, when is it appropriate to use the sukuk exchange method as opposed to issuing new sukuk?
A: The sukuk exchange offer is one of the sophisticated liability management tools. Sukuk vary from direct bank loans, in that it cannot be re-financed ahead of its maturity, unless it includes an early redemption option. This leads companies to either wait for the maturity of the sukuk and re-finance, or offer the existing sukuk holders with the opportunity to exchange the previous sukuk, which will be maturing soon, with a new sukuk at enhanced terms.
Q: Was the sukuk exchange optional for investors?
A: Yes, existing investors had the choice either to exchange all or part of their holdings, or maintain their investments unchanged. This issuance presented various investor choices.
Q: Was the issuance available for new investors as well?
A: Yes, the sukuk offering was structured to receive new investors. With the debut sukuk issued more than six and a half years ago, the market has witnessed many changes, with new investors seeking opportunities to participate in sukuk issuances. It was therefore important for the structure to allow for both an exchange offer and new money investment.
Q: The exchange process is not typical in the Saudi market, was the execution difficult?
A: The exchange process required extraordinary efforts to coordinate between the Capital Market Authority (CMA), legal consultants, sharia authorities, investors, Securities Depository Center (Edaa), issuing firms, sukuk holders’ agents and trustees, among other related agencies.
HSBC Saudi Arabia prides itself for having the expertise and qualified team to execute such sophisticated deals.
Q: Are more companies looking to issue sukuk as part of their financing options?
A: Generally, a healthy debt capital market is an important component of the overall financial sector. The development of the bonds and sukuk market is one of the pillars of the Financial Sector Development Program, which is one of Vision 2030 programs.
The sukuk market is considered an appropriate financing method for solvent companies that seek to diversify their financing resources and attract fixed-income investors. A sukuk exchange offer may also be an appropriate means of re-financing sukuk nearing maturities, as it reduces re-financing risks, which makes the sukuk market a viable option for suitable institutions.
HSBC Saudi Arabia is the Kingdom’s most active investment firm, topping the list of peers in the Kingdom, with 44 local offerings since 2006, according to Bloomberg.
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