LONDON, 15 August 2005 — Indonesia is set to launch its debut sovereign Islamic Sukuk (bond) over the next few months, as the global Sukuk market is once again seeing a flurry of activity. The Indonesian Central Bank, which will issue the proposed $500 million Sukuk is cooperating with the Jeddah-based Islamic Development Bank, which is advising on the structure.
The IDB itself, in line with its 5-year Strategic Plan which includes mobilizing resources from the market, started the ball rolling in May this year with a quasi-sovereign $500 million floating rate Sukuk under a $1 billion medium term notes (MTN) program.
The AAA rated issuance was oversubscribed by $780 million, within a few days of the launch. “We had to close the issue quickly because orders were still coming in, with the prospect of raising the size of the issue,” stressed an IDB source.
The IDB’s MTN program is the first of its kind in terms of structure. In July 2005, CIMB, the Malaysian investment bank, lead arranged with others “the world’s first rated Islamic Residential Mortgage-backed securitization transaction” based on the issuance of a Musharaka-based Sukuk. The RM2.05 billion 6-tranche quasi-sovereign Sukuk issue of tenors ranging from 3 years to 15 years, was launched by the Malaysian Mortgage Corporation, Cagamas MBS Berhad.
The originator of the issue is the Malaysian government which through its Housing Loans Division appointed Cagamas in April 2004 to securitize the entire pool of the government’s Housing Loans and Home Financing mainly given to civil servants and pensioners. The mandate is not only for the existing portfolio but extends to all future Malaysian government Housing Loans and Home Financing.
As such mortgage securitization has a built-in future market in Malaysia at least in the government sector, where civil servants get subsidized housing. Muslim civil servants are also obliged to use Islamic mortgage facilities for housing supplied by the government.
There are growing signs of corporate issues now originating in other GCC markets such as Qatar and Kuwait. The biggest potential market, Saudi Arabia lags in terms of corporate Sukuk issuance. The Kingdom has yet to issue its debut sovereign Sukuk although there are reports that SAMA (the Saudi Arabian Monetary Agency) is considering such an issue.
In July 2005 also, the $134 million Al Marfa’a Al Mali Sukuk, a 5-year Istisna-Ijara Sukuk, which will part finance the Bahrain Financial Harbor’s first phase, was successfully closed. The issue was arranged by Bahrain-based Liquidity Management Center (LMC), which also acted as structuring adviser and placement agent. Senior lead underwriters were Gulf Finance House, Commercial Bank (Bahrain) and LMC. Further lead underwriters were IDB, Dubai Islamic Bank, Emirates Islamic Bank and Bahrain Islamic Bank, along with other not named institutions.
Bahrain-based Arcapita Bank, formerly First Islamic Investment Bank, has also mandated Bayerische HypoVereinsbank AG (HVB), Standard Bank and WestLB AG, (London branch), to lead arrange a $200 million 5-year multi-currency Murabaha-backed Sukuk. The Sukuk will be fully underwritten by the lead arrangers. Arcapita Bank has issued three Sukuk in the past. The proceeds of the latest Sukuk will be used to finance the activities of the bank in Europe, North America, and the Middle East.
By far the biggest recent corporate issuance is the $550 million 7-year debut Sukuk issued by Emirates airline. The issue’s mandated lead manager was Dubai Islamic Bank, which also is the joint book runner with HSBC and Standard Chartered Bank. The proceeds of the issue, which is listed on the Luxembourg Stock Exchange, will be used to finance the new Emirates Engineering Center and headquarters building in Dubai. The issue, which is priced as 0.75 percent over LIBOR with 12-months periodic coupon payments, was well received by the market and oversubscribed by $824 million.
The Sukuk market, however is not confined to assets in Muslim countries. In fact the potential of the Sukuk structure is applicable universally. London-based international law firm Taylor Wessing stressed that it recently advised on “an innovative 143 million pounds Islamic property finance deal on a landmark building.”
Taylor Wessing advised a consortium including Bahrain-based Taib Bank and Hong Kong-Based Dominion Asset Management (represented in the United Kingdom by Pelham Associates) on the purchase of the prestigious “Sanctuary Buildings” property in London SW1.
The equity for the deal was raised through two Sukuk issues and the senior debt, provided by UK High Street bank, Lloyds TSB, invested using an innovative Musharaka structure, which is a form of partnership or joint venture between two entities whereby each party contributes to the partnership capital in equal or varying degrees to establish a new project or to share in an existing one with profits and losses being shared on a proportionate basis.
