Sovereign Sukuk:

Government of Indonesia’s Experience

DAHLAN SIAMAT
Director of Islamic Financing
Ministry of Finance – Republic of Indonesia
A Presentation on Asian Regional Public Debt Management Summit
Organized by Bank Negara Malaysia and Asian Development Bank (ADB)

Kuala Lumpur, 3 – 5 November 2009

 Agenda

I. GOI Sovereign Sukuk:

Roadmap, Preparation, and Impediments

II. GOI Sukuk Management:

Policy and Strategy

III. GOI Sukuk Market Development

IV. GOI Sukuk Issuance: Case Study

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 I. GOI Sovereign Sukuk:
Roadmap, Preparation, and Impediments
 Roadmap: GOI Sovereign Sukuk

• Sovereign sukuk issuance through Conversion Scheme;

• Establishment of study team;
• Amendment of Law No 24/2002 on Government Debt
Securities;
• Government regulations;
• Government regulations in lieu of law on the sovereign
sukuk;
• Sovereign Sukuk Law Number 19 Year 2008.

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 Preparation of Sukuk Issuance

™ Sovereign Sukuk Law.

™ Government Regulation and establishment of SPV:
™ on shore vs off shore;
™ single vs on off.
™ Minister of Finance Regulation.
™ Fatwa and Shariah Opinion.
™ Preparation of Underlying Asset and Parliament approval.
™ Joint Lead Managers and Legal Counsel appointment.
™ Deal or Non Deal Road Show.
™ Documentations:
™ Offering Circular/ Prospectus;
™ Agreements and Undertakings.
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 Impediments

• legal basis;
• underlying assets;
• establishment of SPV;
• transfer of asset: beneficial title vs legal title;
• trust concept;
• taxation.

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II. GOI Sukuk Management:
Policy and Strategy
 GOI Sovereign Sukuk Issuance:
Major Objectives

• diversification of state budget financing resources;

• accessing Islamic financial market;
• enhancing the development of Islamic financial market;
• creating a benchmark;
• broadening investors base;
• developing an alternative instrument of investment;
• optimizing the utilization of state-owned assets;
• project financing.

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 Debt Instruments for Budget Financing

Conventiona Bonds Wholesale

l
Securities
Retail
Government T-Bills
Securities

• Wholesale
• Retail
Sovereign
Debt Sukuk • Islamic T-Bills
Instruments • Project Financing

Foreign Loan

Loan

Domestic Loan

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 GOI Sovereign Sukuk Development

™ Sovereign Sukuk Law ™ Ijarah Sukuk

™ Government regulations ™ Retail Sukuk
(SPV establishment) ™ Islamic T-bills
™ Fatwa from National ™ Project Financing
Shariah Board – Sukuk
Indonesian Council of
Ulama ™ Exchangeable Sukuk
Sukuk
™ Shariah opinion Legal Basis Instrument
Development

Sukuk Issuance
and Market Underlying
Development Assets
Preparation
™ Preparing state-owned assets
™ Domestic and Global Sukuk ™ Identification of infrastructure
™ Sukuk Structure projects
™ Bookbuilding vs Auction ™ Use of GOI shares in SOE for
™ Private placement Exchangeable Sukuk
™ Secondary Market development ™ Use of services
™ Primary Dealer System
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 GOI Sukuk Issuance Program

™ Regular issuance for domestic market:

ƒ Auction:
- Medium and long-term tenor
- Islamic T-Bills

ƒ Bookbuilding:
- Wholesale Sukuk
- Retail Sukuk
- Project-based Sukuk

ƒ Private placement:
- IDR or foreign currency denominated
™ Regular issuance in International Market:
- Global Sukuk

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 GOI – SPV Profile

• A special legal entity by law;

• Issuer of Sovereign Sukuk;
• Incorporated in Indonesia;
• Established under government regulation;
• Acting as Trustee;
• Single SPV or one off SPV.

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 Underlying Assets:
State-Owned Assets

™ Any state-owned assets or the assets that are purchased

or obtained under the State Budget or other legitimate
sources;
™ The use of assets as underlying subject to the Parliament
approval;
™ Type of the Assets:
ƒ Land and buildings;
ƒ Infrastructure Projects;
ƒ Services.

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 GoI Sukuk Issuance:
Transaction Document

™ Ijarah/Istisna`/Musharaka Agreement
™ Management Agreement
™ Purchase Undertaking/Sale Undertaking
™ Service Agency Agreement
™ Cost Undertaking
™ Syariah Endorsement
™ Offering Memorandum/Prospectus
™ Purchase Agreement
™ Declaration of Trust
™ Listing Application
™ Certificate Purchase Agreement
™ Agency Agreement

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III. GOI Sukuk Market Development
 GoI Sukuk Products:
An Overview
Islamic T-Bills (SPN-S)
Regular Sukuk
ƒ Fixed / floating rate ƒ Short-term
ƒ Medium to long term (>5 years) ƒ Discounted
ƒ IDR / USD denominated ƒ Tenor < 12 months
ƒ Tradable at market price ƒ Coupon payable at maturity
ƒ Bullet payment at maturity ƒ Tradable at market price
ƒ Issued through auction or bookbuilding ƒ Objectives: cash-mismatch financing &
ƒ Objective: State Budget financing Islamic money market development.
Islamic
Financing
Instruments

Retail Sukuk Project Based Sukuk

ƒ Fixed rate Ijarah
ƒ Tenor 3 – 5 tahun ƒ Fixed / floating rate Hybrid
ƒ Tradable at market price ƒ Medium to Long term
ƒ Individual Investors ƒ Tradable at market price
ƒ Redeemable at par (100%) ƒ IDR / USD denominated
Islamic Saving Bonds ƒ Objective: infrastructure project
development
ƒ Fixed rate Ijarah
ƒ Tenor 3 – 5 tahun
ƒ Non-tradable / Hold to Maturity
ƒ Individual / institution Investors
ƒ Redeemable at par (100%) or Amortized

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 Key Factors of
Domestic Sukuk Market Development
DEEP & LIQUID MARKET
Sufficient Market Absorption Capacity & Efficient Price/Yield

PRIMARY MARKET
DEMAND •ACTIVITIES:
Regular Issuance (Bookbuilding, Auction,Private Placement)
• Banks •INFRASTRUCTURE: SUPPLY
• Securities Companies Trading System, Institutional Infrastructures
• Mutual Funds • Bonds
• Foreigners SECONDARY MARKET
• Pension Funds •ACTIVITIES: • Sukuk
Buy-Sell, Buyback
• Insurances
•INFRASTRUCTURE:
• Central Bank Buyback System, Primary Dealers, Selling Agent,
Repo,BenchmarkYield Curve, Brokers/Dealers

REGULATION & SUPERVISION

CENTRAL BANK Securities and MOF
Monetary Policy: Exchange • Debt Strategy (Portfolio Management and Market Development)
Commissions - Products (structure, amount, currency)
- OMO (Regular and
- Method of sale/Issuance (Auction, Reverse Auction & Private
Irregular) (SEC) Placement
- Secondary Reserve • Transparency • Fiscal Policy
• Price Discovery - Net Additional Debt
- Tax Incentive
• Secondary Market
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 GOI Sukuk Market Development:
Challenges

™ Undeveloped market:
• illiquid secondary market
• buy and hold perspective
• no benchmark
• price discovery mechanism
• lack of market infrastructure
™ Tax regulation
™ Investors perspective on expected yield
™ Underlying assets

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 GOI Sukuk Market Development:
Opportunities

™ Authorities strong support

™ Islamic financial institutions growth
™ Larger potential investors:
Islamic and conventional
™ Legal infrastructures
™ Lack of supply, many demands

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 Sukuk Structure:
Ijarah - Sale and Lease Back
Issuance and Coupon Payment

1a. Sales of Asset 1b.Sukuk

(Beneficial Title) issuance

SPV Investors
1d. Proceeds (Issuer/ Trustee)
1c. Proceeds

1e. Lease of Asset

Secondary Market
MoF - GOI
(Obligor/Originator)

2. Periodic Lease Payment

Paying
Agent
3. Sukuk Redemption
Maturity Date

4. Sales of Asset SPV 5. Sukuk Investors

(Issuer/ Trustee)
MoF - GOI
(Obligor/Originator)
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IV. GOI Sukuk Issuance: Case Study
 Debut IDR Sukuk Issuance

SBSN Series
Description
IFR-0001 IFR-0002
Total Bids IDR 4.839 T IDR 3.231 T
Total Alloted IDR 2.714 T IDR 1.985 T
Highest Bid Yield 13.50% 12.75%
Highest Accepted Yield 11.80% 11.95%
Coupon 11.80% 11.95%
Price 100% 100%
Issuance Date/Settlement Date 26 August 2008 26 August 2008
Maturity Date 15 August 2015 15 August 2018
Coupon Payment Period Semi annual Semi annual
Bid to cover ratio 1.78 1.63

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 IDR Sukuk Issuance:
Distribution by Investor Type

IFR-0001 (7 Yrs) IFR-0002 (10 Yrs) Total

(IDR bio) (%) (IDR bio) (%) (IDR bio) (%)
Insurance 943.2 34.74 1,442.0 72.6 2,385.2 50.8
Bank 65.0 2.39 40.0 2.0 105.0 2.2
Institution 704.5 25.95 20.0 1.0 724.5 15.4
Shariah Bank 560.0 20.63 220.0 11.1 780.0 16.6
Pension Fund 236.0 8.69 110.0 5.5 346.0 7.4
Mutual Fund 156.0 5.75 42.0 2.1 198.0 4.2
Foundation 47.0 1.73 111.0 5.6 158.0 3.4
Retail 3.0 0.11 0.0 0.0 3.0 0.1
Total 2,714.7 100.0 1,985.0 100.0 4,699.7 100.0

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 USD 650 Million Debut Sovereign Sukuk

Summary of Term and Conditions

Sukuk Issuer : Perusahaan Penerbit SBSN Indonesia I (PPSI-I)

Sukuk Obligor : Republic of Indonesia

Currency / Format : US Dollar 144A/Reg.S
Structure : Sukuk Al-Ijara
Obligor / Sukuk Ratings : Ba3 (Moody`s)/ BB- (S&P)/ BB (Fitch) (all stable)
Sukuk Assets : Beneficial rights over approximately 66 properties
used for government purposes
Amount : USD 650 million
Pricing/Settlement Date : 16 April 2009 / 23 April 2009
Maturity Date : 23 April 2009
Periodic Distributions : 8.80% per annum, payable semi-annually
Price / Re-offer Spread : 100% / UST5 + 705.3 bps
Listing : Singapore Stock Exchange
Governing Law : English Law (asset-related documents under
Indonesian Law)
Joint Bookrunners and : HSBC, Standard Chartered, and Barclays Capital
Joint Lead Managers

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 GOI Sukuk Maturity Profile
(as of October 19, 2009)

(in IDR trillion) Exchange rate = Rp 9.477/USD

7

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Total 2.69 - 5.56 - 6.16 2.71 - - 1.99 - -
SDHI 2.69 - - - - - - - - - -
SNI - - - - 6.16 - - - - - -
SR - - 5.56 - - - - - - - -
IFR - - - - - 2.71 - - 1.99 - -

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Average Daily Trading – Government Islamic Securities
(as of October 16, 2009)

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Ownership of Government Islamic Securities
(as of October 16, 2009)

[in percentage]
INSTITUTIONS Apr‐09 May‐09 Jun‐09 Jul‐09 Aug‐09 Sep‐09 16‐Oct‐09
Total Banks 11.63 8.76 7.95 7.91 7.85 8.06 7.91
‐ Conventional Banks 4.16 2.25 2.03 1.99 1.74 1.95 1.81
‐ Islamic Banks 7.47 6.52 5.92 5.92 6.10 6.10 6.10
Insurance Company 31.39 27.58 24.96 25.02 24.54 24.48 24.52
Pension Fund 7.77 6.83 6.17 6.16 6.14 6.14 6.14
Individual 29.15 19.81 17.33 17.27 17.25 17.23 17.20
Mutual Funds 6.90 12.88 12.45 12.39 13.00 13.13 13.39
Non Resident 0.73 0.59 0.64 0.67 0.64 0.67 0.62
Others 12.43 10.79 9.73 9.83 9.83 9.53 9.46
Departemen Agama 0.00 12.76 20.75 20.75 20.75 20.75 20.75
TOTAL 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Notes:
* Others consist of Corporate, Financial Institutions, Securities Company, Foundation, etc

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 Indonesia`s Credit Rating
Solid economic fundamentals helped the improvement of Indonesia`s sovereign credit rating since
2001
Moody`s Investors Service just upgraded Indonesia`s foreign and local-currency sovereign debt ratings to Ba2 with stable outlook.
The upgrade was prompted by the Indonesian economy`s relatively strong resilience to the global recession, healthy medium-term
growth prospects as well as its prudent debt management.

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 Thank You

Any queries please contact:

Directorate Islamic Financing
Directorate General of Debt Management
Ministry of Finance - Republic of Indonesia

Phone: (62) (21) 351-6296; Fax: (62) (21) 351-0727

e-mail: webmaster@dmo.or.id
website: www.dmo.or.id