Al Rajhi Bank, the world's leading Islamic bank by asset size and market value, has tapped into the global debt market by launching $1 billion in sustainable sukuk, according to a document obtained by one of the deal's arranging banks. These bonds, known as Additional Tier 1 (AT1) sustainable sukuk, cater to Sharia-compliant investors and hold a special characteristic - they are perpetual in nature.
Perpetual bonds, unlike traditional bonds with a set maturity date, have no predetermined redemption date. However, they come with a call option, allowing the issuer, in this case, Al Rajhi Bank, to redeem the bonds after a specific period. The newly issued sukuk offers investors the first chance for redemption in May 2029.
The issuance garnered significant investor interest, exceeding $3. 5 billion in orders. This strong demand allowed Al Rajhi Bank to secure a final yield of 6. 375 percent on the bonds, which is lower than the initial guidance of around 6. 875 percent. Allocation of the bonds to investors is expected to be finalized by the end of the day.
AT1 bonds are considered the riskiest form of debt a bank can issue. This elevated risk profile is due to their perpetual nature and the ability of the issuer to defer interest payments during times of financial stress. However, they also come with certain advantages for the issuing bank. Because they have no maturity date, AT1 bonds strengthen a bank's capital adequacy ratios, which are key regulatory metrics that assess a bank's ability to absorb financial losses.
The specific use of proceeds from the issuance hasn't been disclosed by Al Rajhi Bank. However, the designation of the bonds as "sustainable" suggests that the funds might be directed towards financing projects that align with environmental, social, and governance (ESG) principles. This aligns with the growing trend of sustainable finance, where investors are increasingly seeking to allocate capital towards projects that promote positive environmental and social impact.
The successful issuance by Al Rajhi Bank marks a significant development in the Islamic finance market. It demonstrates the growing appetite from both issuers and investors for Sharia-compliant financial instruments that cater to sustainability goals. This trend is likely to gain further momentum in the coming years, solidifying the role of Islamic finance in supporting the global shift towards a more sustainable future.