KUALA LUMPUR, 27 June 2005 — The Islamic Development Bank (IDB), in line with its 5-year Strategic Plan which includes mobilizing resources from the market, has issued a $500 million floating rate Sukuk under its $1 billion medium term notes (MTN) program.
The road show for the $500 million issuance was completed on May 23, 2005, and the first drawdown of $500 million took place two days later. Demand for the AAA rated issuance was reflected by its oversubscription of $780 million by the closing date of June 15, 2005. “We had to close the issue quickly because orders were still coming in, with the prospect of raising the size of the issue,” stressed a source.
The road show, according to the IDB, was held in eight countries in the Far East, Europe, and the Middle East, with presentations made to institutional investors both as a group and on an individual basis.
The geographic breakdown of the subscribers to the Sukuk reflects a move away from reliance on Middle East, especially Gulf investors. In fact, for the first time for a GCC promoted Sukuk, Far East investors outstripped investors from the Middle East. Far East investors accounted for 35 percent of the uptake; Middle East investors for 32 percent; European investors for 26 percent; and the remainder was taken up by Supranationals. The Sukuk was subscribed by 56.4 percent of IDB member countries; and 43.6 percent by non-member countries.
Proceeds from the MTN issuance, which is registered in Luxembourg and listed on the local stock exchange, will be used to finance the corporate requirements of the multilateral development bank which has just celebrated its 30th anniversary at the 30 Annual Meeting of its board of governors held in Putrajaya in Malaysia.
The 5-year issue is priced at 6 months LIBOR plus 12 basis points, and matures in June 2010. The coupon payment frequency is every six months. This is a better pricing than the 6 months LIBOR plus 20 basis points for the IDB’s inaugural $400 million Ijara Sukuk launched two years ago.
The IDB stresses that its $500 million Sukuk has achieved a good oversubscription for a AAA rated entity and has attracted a better geographical distribution of the investors. It has also achieved a better pricing compared to its last issuance and has incurred a much lower issuing cost. The issuance has also seen the emergence of lead managers from IDB member countries, in this case CIMB from Malaysia and Dubai Islamic Bank. This is in addition to two international managers in Deutsche Bank and HSBC.
The involvement of Deutsche Bank as a lead manager meant the subscription to an Islamic issue of a number of German institutions for the very first time. The $500 million issue also has three market makers in place as opposed to only one for the first IDB issue. The IDB, of course, as an Islamic financial entity, cannot issue interest-bearing debt instruments. As an alternative, the IDB is establishing $1 billion MTN program, under which it will securitize a portion of its Sukuk assets by selling them to a charitable trust, IDB Trust Services Limited, a limited par value company registered in the Channel island of Jersey. All of the issued shares of IDB Trust Services Limited are held by or on behalf of Ogier Corporate Trustee (Jersey) Limited as share trustee.
The Sukuk assets are a ring-fenced portfolio of IDB assets separate from other assets of the multilateral development bank. The portfolio comprises, not less than 30 percent of its total value, assets leased to some clients of the IDB under Ijara (leasing) contracts (the ownership of which shall be transferred to the lessees at the end of the lease period) for a rental consisting of the unamortized portion of the acquisition cost of the leased assets (the principal) and a variable or fixed portion (the profit), in addition to installment payments under Murabaha and Istisna contracts which the IDB has entered into with some of its clients.
IDB Trust Services Limited will fund the purchase of the Sukuk assets through the sale of trust certificates. As assets under the trust mature, the IDB will sell to the trust, or assist the trust in replacing maturing assets with new Sukuk assets.
Under Islamic banking principles, however, the IDB must retain the risk of default on the Sukuk assets sold to the trust. As such the IDB is the liquidity facility provider to cover costs and expenses and periodic distribution payments to Sukuk holders; and the unconditional and irrevocable guarantor of the Sukuk issuance.
Together, these undertakings commit the IDB to provide to the trustee funds sufficient for all periodic distribution payments and principal payments due to investors to be paid on time and in full. Accordingly, the IDB’s MTN program in all of the unsubordinated issuances of trust certificates made under that program are assigned the same AAA rating by Standard & Poor’s, the international rating agency, as the institutional rating assigned to the IDB itself.
This pioneering Sukuk issuance, according to analysts, will further enhance the global Islamic bond market, which currently totals about $15 billion to $20 billion.