LONDON, 6 November 2006 — Structurers of Sukuk (Islamic bonds) are increasingly claiming that they are involved in cutting edge innovation and in many respects, according to some bankers, the current crop of Sukuk structures “are not yet quite the done deal”.
The biggest challenge is Shariah compliance, especially reconciling the whole gamut of sub-structures such as the use of SPVs (special purpose vehicles); trusts; leverage financing; the relationship between issuer and SPV; calculation of rental income streams; trustees and agents, with Islamic investment principles.
The closing at end October 2006 of the world’s first exchangeable and effectively equity-linked Sukuk — the $750m Islamic Exchangeable Trust Certificates issued by Khazanah Nasional Berhad, the wholly-owned investment subsidiary of the Malaysian Finance Ministry — has been preceded and followed by a spate of other “innovative” Sukuk in the last few months.
This includes inter alia the $200m Istisna-cum-Ijara Sukuk issued on behalf of the Dubai-based Tabreed, the National Central Cooling Company PJSC; the $23m Istisna-cum-Ijara Sukuk issued by Kingdom Installment Company; the SR3bn Sukuk issued by SABIC - all issued in July 2006; the $165.67m Sukuk issued in June 2006 by East Cameron Partners in Texas; and the $150m Musharaka Trust Sukuk issued by Kuwait’s The Investment Dar (TID) and lead managed by Bahrain-based Unicorn Investment Bank and the London branch of German bank, WestLB. One of the unique features of the TID Sukuk is that it has both a call and put option for early redemption by either investors of the issuer.
The call and put options, stresses David Testa, head of Asset Securitization at WestLB’s London branch, have been incorporated primarily for reasons of flexibility for both investors and issuer.
“Companies in the Middle East are growing fast. Many are being rated by agencies such as Capital Intelligence. Some of them are also seeking ratings by the ‘Big Three’ international rating agencies (Moody’s, Standard & Poor’s and Fitch). Clearly it is not particularly attractive for the issuer to lock into a five-year facility. Similarly for the investor, the option to exit at the end of the third year means sharing at least half of the yield. It is a win-win situation for everyone,” explains Testa.
With market appetite for Islamic corporate issuances projected to grow significantly over the next few years especially in the Middle East and Southeast Asia according to various reports, including a recent study by City-based international law firm, Trowers & Hamlins, some analysts stress that this is a further sign of the growing maturity of the global Sukuk market and the global acceptance of the Sukuk as an alternative capital market instrument.
The $150m 5-year Musharaka Trust Sukuk, issued by TID Global Sukuk I Limited, a Cayman Islands-registered special purpose vehicle (SPV), a single-purpose company with the sole task of issuing the Sukuk, closed in September 2006, not surprisingly well oversubscribed.
The Sukuk was issued on behalf of Kuwait’s TID, which had a market capitalization of $2.1bn at end June 2006. According to the two lead arrangers Unicorn Investment Bank (UIB) and WestLB London Branch, this is the first Musharaka Sukuk structured with a put option for investors and a call option for the issuer and with recourse to the promoter/Obligor.
“The put option allows each certificate holder (investor) to exit the transaction at the end of year 3, while the call option allows the issuer the same flexibility at the same date. With this Sukuk, we have added value to Investment Dar by extending their liability profile, lowering their funding cost and broadening their investor base — all through a Shariah-compliant structure,” explains Salim W. Abboud, Director of Capital Markets at UIB.
The SPV holds the units on behalf of the investors. The SPV is also the Trustee Agent on behalf of the Sukukholders, while Deutsche Bank is the Payments Agent. Testa, however, believes that some of the features of the structure “can be further tweaked from a Shariah point of view and further improved.” The structure was approved by the Shariah Boards of both UIB and TID, and is a freely transferable instrument under Shariah principles.
The Sukuk which matures in September 2011, has a competitive spread of 6 months LIBOR plus 125 basis points per annum for the first 3 years; and 6 months LIBOR plus 175 basis points per annum for years 4 and 5. The use of the proceeds are for general corporate purposes of The Investment Dar Company, which at end June 2006 had total assets of $2.938bn and shareholders’ equity of $880m and which is one of the fastest-growing Kuwaiti Islamic real estate and consumer finance companies.
TID current enjoys an issuer rating of A- from ICRA, the Asian affiliate of Moody’s; and a long-term rating of BBB assigned by Cyprus-based Capital Intelligence, which specializes in emerging market ratings. WestLB, as the sole bookrunner and global coordinator, was particularly pleased with the subscription uptake for the Sukuk. According to Testa, some 15 banks and institutions participated in the subscription, including six institutions from the UK and Europe; and a handful from Asia. The bulk of the uptake was from institutions from the Middle East region, especially from the GCC, and one or two from North Africa. The TID Global Sukuk I Limited was listed on the Dubai International Financial Exchange (DIFX) on Oct. 16, 2006 — the first Sukuk to be listed on the exchange by a financial institution.
According to DIFX, the $150m TID Global Sukuk I brings the total value of Sukuk listed on the exchange to $4.11bn — the largest volume for Sukuk of any exchange in the world.