Ershad Hossein, CEO of City Bank Capital, on Bangladesh’s first corporate green sukuk

Ershad Hossein, CEO of City Bank Capital, on Bangladesh’s first corporate green sukuk

Beximco’s green sukuk has generated a big buzz in the Islamic bond market. Not only is it the first corporate sukuk in Bangladesh, but it is also the country’s first green sukuk. Launched in July 2021 by Beximco, a multinational conglomerate headquartered in Bangladesh, the green sukuk facility is worth BDT30 billion (USD 347.55 million). Fifty percent was allocated through private placement, 25 percent was offered to the company’s shareholders, and the rest through public offering.

The five-year term, asset-backed convertible sukuk is expected to bring the idle money of Shariah-compliant investors into the domestic market, which will play a big role in the country’s national development, contributing to industrialization and expansion of trade and commerce, and attracting foreign investment.

City Bank Capital, a subsidiary of City Bank, one of the largest private commercial banks in Bangladesh, was appointed as the advisor and issue manager of the green sukuk, which has garnered a lot of interest from financial institutions, high-net worth individuals, foreign investors, and non-resident Bangladeshis. The investment bank has been a long-time proponent of ESG projects and is looking to expand into green bonds, blue bonds, social bonds, and affordable housing.

Bangladesh has been increasingly moving towards a sustainable future. The government recently scrapped several coal-fired power projects and emphasized on environmentally friendly power generation projects instead. Beximco hopes to cash in on the incentives offered by the government for green projects; its power plants will enjoy tax holiday until 2034, duty-free import and certain tariff and VAT concessions.

In this interview, Ershad Hossain, CEO of City Bank Capital, and a veteran of global financial markets, sheds light on the innovative features of this green sukuk and how it differs from other sukuks in the global market. He also discusses the growing appetite of financial institutions for green Islamic bonds and City Bank Capital’s shift towards more sustainable and ESG investing.

City Bank Capital was appointed as adviser, arranger, and issue manager of the first green sukuk in Bangladesh, the Beximco Green Sukuk. What encouraged the issuance of this green sukuk and what do you hope to achieve with it?

City Bank Capital is one of the leading investment banks in Bangladesh, and we’ve been at the forefront of introducing innovative debt securities in this country. We introduced the first domestic guaranteed bond for a local company called Rangpur Foundry Limited. Then we introduced the first additional Tier 1 perpetual bond, which was Basel III compliant, for our parent company City Bank. And we have 11 financial institutions which we are issue managers for, so we have been quite innovative for Bangladesh, bringing in new kinds of debt securities. We’ve been investing in renewable energy and were part of a PET bottle recycling company. We were also part of the first impact-investment in Bangladesh from India.

With regards to the Beximco Green Sukuk, 90 percent of Bangladesh is Muslim majority but unfortunately, we have not seen a single sukuk issuance in this country before. Also, the market share of the banking sector is USD 170 billion, and out of that, Islamic banks account for 21 percent, which is USD 34 billion. But even then, we had not seen any sukuk issuance.

Only recently, Bangladesh Bank, the country’s central bank, issued one billion dollars’ worth of domestic Taka-dominated sukuk in two tranches, and the larger tranche was eight times oversubscribed. This shows the appetite of financial institutions in this type of Islamic bonds.

City Bank was approached by Beximco because they needed a structure to raise funds for their solar projects and environmentally friendly textile machineries. We met with the Bangladesh Securities and Exchange Commission and Beximco, we put our heads together and came up with this green sukuk structure. This sukuk, as a debt security, is one of the largest corporate sector issuances so far. It is local currency denominated, but the size is USD 350 million which is very big for Bangladesh.

The proceeds will go into the construction of two solar power plants with an aggregate capacity of 230 MW of electricity, representing the largest solar project in Bangladesh. Of the USD 350 million, USD 93 million will go into purchase of environmentally friendly technology and energy efficient textile machinery from the client. This innovative sukuk has a convertible option, it has a great enhancement feature and a very high profit rate, where the base is 9 percent plus. In this environment of low-interest rates, this is a very attractive yield for investors. It’s also bankruptcy remote because we have a special purpose vehicle.

This first green sukuk is a gamechanger for the sukuk landscape in Bangladesh and also for non-Islamic asset-bank securities. We’ve done a lot of reforms in the regulations and in the tax structure. Beximco was involved, Bangladesh Securities and Exchange Commission was involved, we also approached the National Board of Revenue. All those taxes that are connected to transport and properties have been exempted for sukuk transactions, so this is a gamechanger.

I believe that the Basel III compliance and the local capital compliance from the central bank is actually limiting banks from lending money to large corporates. We see that a lot of entrepreneurs are coming to the capital market to raise funds. So, besides the USD 170 billion banking sector, we see that there will be an asset-backed security market as well. Moving forward I see an exponential growth in the debt-securities market. This is what we’re going into and it’s very positive.

How has the response been to the Beximco Green Sukuk?

We’re seeing a tremendous response from investors given that this is the first Islamic issuance from one of the largest private-sector companies which has a high profit return and a convertible option at a discount, as well as being green. We’ve seen interest from financial institutions, corporates, and individuals. The public offer is still going on. The existing shareholders who hold Beximco shares are in the private offer. There are 15 billion Taka worth of private offer for institutions and high-net-worth individuals. On that, roughly one-third has been done. So, we’ve seen great response and we’ve been doing many roadshows to different associations, including merchant banking associations and financial institutions.

We’re hopeful that this issuance will be oversubscribed because people have a natural affinity towards Islamic financing in this country and we have unlocked that. We’re also looking forward to foreign investment in the sukuk space. We’re doing a few online roadshows abroad, and I’m keen to see offshore interest into the sukuk space in Bangladesh.

How different is the Beximco Green Sukuk from the other green sukuks that have been issued around the world? What advantages does it offer to investors?

This sukuk is a bit different from what has been issued in Malaysia or the Gulf Cooperation Council countries. First, there is a convertible option and that is at a discount, of 25 percent. The exercise of that convertible option is 20 percent each year. You have the option to convert 20 percent, or you can convert 5, 10 or 15 percent, in multiples, and it will do it in the next five years of the bond. So each year you can convert.

If you do not convert in the first year, you have the option to carry it forward and convert it later. That is unique, I haven’t seen it in a lot of structures. And the 25 percent discount is on the last 20 business days’ average price. This is another way to get capital gain for the investors, and also to get redemption. They can convert it into issuance; there’s no lock-in, they can go into the market and sell it, so it’s a kind of redemption with the capital gain possibility.

If you keep it for the five years until redemption, you get an attractive rate of 9%++ per year, where the market yields in Bangladesh for the local currency are hovering around 5-6 percent. In addition to the base rate of 9 percent per year, there is a profit margin rate of 10 percent of the difference between the base rate and annual dividend rate declared in Beximco’s Annual General Meeting of the preceding year. All these are creative and innovative features which make this green sukuk different from a lot of the other instruments around the world.

The green sukuk market is still small compared to the conventional sukuk market, with total outstanding debt amounting to USD 10 billion in 2020, according to the Asian Development Bank. What is your outlook for the green sukuk market? Where do you see it heading?

There are a lot of positive signals. Despite the pandemic, we see a lot of buzz in the green sukuk landscape. For example, the Islamic Development Bank raised USD 2.5 billion in March 2021 through its sustainability sukuk issuance, which is also its biggest USD public issuance to date, and the proceeds will be used for green and social development projects. In the coming days, we will see a lot of issuances of green bonds, social bonds, and sustainability bonds.

We’re now working on a blue bond with a company, where they will construct low-emission sea-going vessels. We’re trying to get into that space. In the developed countries in the west, we see a lot of ESG-related investment activities going on, and we see big investment banks like BlackRock, Goldman, and Morgan Stanely coming up with ESG indices. That’s why I think in the Muslim world, we will also see a lot of green sukuks coming out in the overall ESG space.

Some experts believe that green sukuk can broaden the size and scope of the overall sukuk market, helping issuers reach new investors. Has this been the case with the Beximco Green Sukuk?

We have seen a lot of interest from the young generation, the second-generation of entrepreneurs who will become high-net-worth individuals. They are very much concerned about the environment, climate change, and the social aspect of these bonds.

I’m very positive about the development of green sukuk locally and globally. In Bangladesh, the Ministry of Finance and the Securities and Exchange Commission have been proponents of green bonds and blue bonds, which is in line with the SDG goals of the Government of Bangladesh. We realized the commitment of the government and that’s why we structured the Beximco issuance into a green bond and created a structure to tap into the Islamic Shariah-based investor base.

You recently completed 10 years at City Bank Capital, congratulations on this milestone achievement! In this period, has the board of directors considered shifting towards more ESG-related investment strategies? Have you created new sustainable investing products or services in recent years and what are your plans in the area?

I’ve been working in the global investment banking market for the last 30 years. I’ve realized that if I’m not making a difference and an impact through what I’m doing, then the whole exercise of my last 30 years becomes futile. So I’ve been involved in the first investment from the Aavishkaar impact investment fund. They made their first investment in Bangladesh, and we were representing the sale side company, which was a fintech company. The fund’s mandate was to improve the lives of the marginal population, which is basically the retailers and the distributors. That was our first involvement. Then we invested into the solar home systems business in Bangladesh.

We were also involved with a PET recycled bottles business where we played an advisory role. The chairman of our board at City Bank Capital, Mr Aziz Al-Mahmoud, is also a proponent of investing into sustainable projects and he’s very environmentally conscious. The board and the management have also realized that the only way to go forward is through the ESG route. Recently, there’s been a lot of talk about the build-up of methane gases in the atmosphere which is threatening our very existence. With all that, we would like to be in the ESG space, and we are very much committed. If you look at our parent company City Bank, the International Finance Corporation (IFC) is also on the board. They have a mandate in the ESG space and they’re promoting the culture of responsible investing in City Bank group. So we as City Bank Capital are perfectly positioned for ESG investments and I firmly believe this will be the future in the country and globally.