IIT debut sukuk in UK may lead to spate of new issuances
Published: Aug 30, 2010 00:27 Updated: Aug 30, 2010 00:27
The recent launching of the first corporate Sukuk out of the UK by Gateshead-based International Innovative Technologies (IIT) may have taken the Islamic capital markets by surprise, but the signs are that a spate of other UK originations may follow over the next few months.
A major GCC-based sukuk arranger confirmed that it has been working on a corporate sukuk issuance for a UK healthcare company for the last year. The company hopes to launch the issuance next month. A London-based Islamic bank is also working on a sukuk issuance for a UK client which is near to being finalized.
While the IIT 4-Year Musharaka sukuk is modest by market standards with a total issue size of $10 million, Tom Wilkinson, chairman of IIT, is confident that there is potential for other UK companies to access Islamic finance including sukuk as an alternative source of funding.
Indeed, the company which specializes in making state-of-the-art eco-friendly industrial precision milling machines has gone to the international markets to raise funds at a time when SMEs (small-and-medium-sized enterprises) in the UK are finding it difficult to get credit and financing from the high street banks. IIT is a new technology development company specializing in design, precision engineering and manufacture of innovative products, including the m-series range of inertia mills and the c-series range of classifiers, which are used in the construction and waste recycling industries.
"Historically venture capital (VC) and private equity (PE) funds," he explained to Arab News, "have looked for certain board rights and controls, which were challenging to incorporate in a Shariah-complaint investment structure. The investment into IIT via a Musharaka structure is more of a framework by which small, medium and large UK companies can pursue Islamic funding sources, in order to meet balance sheet, working capital, research and development (R&D) and expansion capital requirements."
In fact, the proceeds of the IIT sukuk, according to Wilkinson, will be used as growth capital for the company. "IIT has developed innovative, patented, powder milling technology which can produce very fine powders at very low energy levels plus uniquely recycling waste products for reuse. For instance glass reinforced plastic scrap, instead of going into land fill, is grounded into a fine powder and recycled. Additionally, IIT is developing technologies which will significantly reduce waste streams from coal fired power stations," he added.
The sukuk issue was placed privately with Millennium Private Equity Ltd., leading private equity firm based in the Dubai International Financial Centre (DIFC) and regulated by Dubai Financial Services Authority (DFSA). Millennium Private Equity Ltd. is co-owned by United Gulf Bank (UGB) and Dubai Islamic Bank (DIB). The issuance has a profit rate of 10 per cent per year and matures in 2014. It was also listed on the Cayman Stock Exchange on June 30.
The sukuk is essentially a convertible sukuk, whereby Millennium Private Equity Ltd. can convert the sukuk into equity. The conversion, according to Wilkinson, is based on certain performance milestones, subsequent to which Millennium Private Equity Ltd. would receive agreed equity interest.
For a Northeast England-based SME, IIT could not have been further from the maelstrom of the global Islamic finance industry. Wilkinson was actually introduced to the idea of a sukuk and to Millennium Private Equity Ltd. by one of the existing first round investors in the company. He concedes that it was an "exciting and steep" learning curve to understand the principles of Islamic financing.
"We had concerns on the overall functionality of the Islamic financing, but we were most efficiently helped by the Millennium Private Equity Ltd. transaction team, led by Vally Khamisani and including Nikhil Goel, who helped us understand the principles and ensured that all queries were answered. We believe Islamic financing provides various suggestions on debt levels, type of business to get into etc, which actually is beneficial for the success of the business," he explained.
Although the IIT issuance is modest in terms of volume, it does have the first mover advantage and presents an important psychological boost to potential issuers in the UK and European Union. The UK government has been the most proactive supporter of facilitating Islamic finance as a niche component of an overall competitive financial services sector in the country and to promote London as an international hub for Islamic finance, trade and investment.
Earlier this year, the UK House of Commons adopted the Financial Services and Markets Act 2000 Order 2010 which is aimed at removing barriers and uncertainty in the regulation of alternative finance investment bonds (sukuk) and which the Treasury stresses will reduce compliance and legal costs for these instruments, and facilitate the issuance of corporate sukuk in the UK.
On the UK government's position on issuing a sovereign sukuk in the wholesale sterling market, the previous Labour administration of Prime Minister Gordon Brown stressed that the UK's position "remains that a UK government wholesale sterling sukuk would not at present offer value for money. But we would like to reiterate that this decision was taken after a lengthy consultation and after extensive consideration of a wide range of factors. We will keep this judgment under review and revisit should factors change in such a way that sovereign Sukuk issuance becomes more viable."
The new Conservative-Liberal Democrat coalition government maintains this cross-party support for the Islamic finance sector in the UK. Mark Hoban, MP, exchequer secretary to the Treasury, has confirmed that the Conservative Party supports the steps taken by the (previous) government to create a level playing field for Islamic finance and that it would continue the same approach. He recognized the concerns raised by the audience in respect of a need for clearer criteria to enable the industry to address any government concerns in relation to a UK government sukuk.
However, to Wilkinson, there is no reason now why the UK government should not issue a sovereign Sukuk in the wholesale sterling market. There is a source of capital available which can be tapped only via Islamic financing, he stressed.
These are sentiments commonly echoed by the Islamic finance market in London.
Farmida Bi, partner at City-based international law firm, Norton Rose LLP, who advised IIT on the transaction, for instance, is convinced that "there is no reason why UK corporates and government entities cannot follow suit. They (IIT) found an investor which could only invest in a Shariah-compliant way, hence the structure. This is important. Many Islamic investors are looking at potential investments, particularly in the hi-tech sector."
She believes that UK companies hitherto have lost out on a potentially significant source of alternative forms of investment. "However, this deal," she added, "proves that sukuk can work to great effect in the UK. The injection of funds will help fuel IIT 's ambitious growth plans as well as help it further develop new technologies and products."
