LONDON, 16 May 2005 — The Islamic capital market (ICM) is once again seeing a flourish of activity. A few weeks ago Dubai-registered Gold Sukuk DMCC, which is wholly-owned by Dubai Islamic Bank (DIB), and in cooperation with the Dubai Metals and Commodities Center Authority (DMCC), an entity affiliated to the Dubai gGovernment, issued a $200 million 5-year Sukuk (Trust Certificates).
The Sukuk issuance is based on an innovative joint venture Musharaka concept, allowing certificate holders the option of getting paid in the form of bullion rather than cash. The Musharaka Sukuk is not strictly the first one in the global market. Some two years ago, United Overseas Bank in Singapore structured a S$25 million locally-denominated Musharaka Sukuk for the Islamic Religious Council of Singapore (MUIS). What is novel is the option to elect payment of the periodic coupon rates in the form of gold bullion.
According to Farmida Bi of leading London-based international law firm, Denton Wilde Sapte, which acted for the lead managers, DIB and the London branch of Standard Bank of South Africa, the Sukuk was pioneering in three important respects: “It was the first such rated deal to come out of Dubai (The $1 billion Dubai Civil Aviation (DCA) Sukuk, for instance, was not rated). The gold settlement put option has never been done before. The Musharaka joint venture between the SPI and DMCC is similarly new and has never been tried before, with the proceeds of the Sukuk being used to build three tower buildings in the DMCC Free Zone.”
The second corporate issuance is an unquoted private issue which used a Sukuk Al-Ijara arrangement through a Jersey-based special purpose vehicle (SPV). The unspecified issue was arranged by ABCIB Islamic Asset Management Ltd., the wholly-owned subsidiary of ABC International Bank in London. Supporting the Sukuk, stresses Norton Rose, the City-based international law firm acting for the arranger, is a lease financing of the VLCC (Very Large Crude Carrier) MT Venus Glory, which is owned by the Saudi-owned Pacific Star Group of Companies, and which is chartered by Vela International Marine Ltd.
“This is the first ever transaction in the shipping sector to use an Islamic bond issue. We have worked with ABCIB Islamic Asset Management to enable them to introduce Islamic investors into an otherwise conventional ship finance transaction which has given the owners access to a new source of mezzanine financing at a competitive price. The investors are able to make their Islamically-compliant investment via the purchase of the Sukuk, which give them a beneficial right in the use of the vessel. “We were then able to apply this investment into a pre-existing leasing structure,” explained Neil Miller, head of Norton Rose Islamic Finance Team.
Indeed, according to Norton Rose, the benefit of this structure is that it did not interrupt that pre-existing leasing chain and also allowed conventional finance to continue to be accessed by the owners. Miller thinks that this type of transaction can indeed be tailor-made to suit a host of shipping transactions. The issue is underwritten by ABCIB Islamic Asset management Ltd. and Abu Dhabi Commercial Bank.
The MTN series, on the other hand, by the Jeddah-based Islamic Development Bank (IDB), which in July celebrates its 30th anniversary, is a $1 billion program over the next year or so. The first in the series, a $500 million issuance, will be launched in the next fortnight, and has been on the cards for more than a year. The program, according to IDB sources, has been finalized and the documentation is in place. The issuance will be domiciled in Luxembourg and will also be listed on the Luxembourg Stock Exchange. The issue has also received a rating from both Standard & Poor’s and Fitch.
All three issues are innovative and new in their own respects. For Gold Sukuk DMCC, the timing could not have been more opportune. This deal brings together the Islamic banking expertise of DIB; the gold settlement and clearance expertise of Standard Bank; and the legal structuring expertise of Denton Wilde Sapte.
This deal indeed gives investors the opportunity to receive periodic payments in gold bullion instead of cash, which, says Denton Wilde Sapte, is a first for a public Islamic finance capital market transaction. The gold settlement put option took some time to structure, and is outside the normal clearance system.
Based on the structure and quality of the gold settlement put option, Standard & Poor’s has assigned a preliminary ‘A’ rating to the transaction, similar to the rating assigned to corporate DMCC.
The deal has essentially been structured as a Musharaka (or joint venture) transaction. “Pursuant to the terms of the proposed issue, the SPI,” according to Denton Wilde Sapte Partner Rahail Ali, “will issue dollar-denominated floating rate trust certificates, scheduled to fully amortize over their 5-year term. The issuer shall use the proceeds of the proposed issue to contribute to a joint venture (Musharaka) between the issuer (the SPI) and DMCC.
