LONDON, 14 August 2006 — The bond market in the GCC region has received a major boost in the summer with rated corporate Sukuk (Islamic bonds) especially jockeying with each other for having the most innovative structures and dominating the market in the last two months. Saudi corporates are now increasingly getting involved with issuances, both rated and unrated, which are expected to increase significantly over the next few years, especially now that the Capital Markets Authority (CMA) has finally introduced regulations governing Sukuk transactions and securitization in the Kingdom.
Following the successful issuance by SABIC (Saudi Basic Industries Corporation) of its SR3 billion Sukuk in July, the first such public issuance in the Saudi market under the new Capital Market Law, Tabreed, the National Central Cooling Company in Dubai has issued a $200 million Istisna Sukuk and Unicorn Investment Bank in Bahrain and Standard Bank of South Africa claim to have structured a Sukuk transaction for the Saudi-based Kingdom Installment
Company (KIC) which is “the first true-sale securitization in the GCC and is backed by $23 million of Ijara and Istisna contracts.”
The $200m million Tabreed Sukuk, although jointly lead-managed by Malaysia’s CIMB, Dresdner Kleinwort Wasserstein and HSBC Middle East, was actually structured by Bahrain-based Islamic Finance Consultants (IFC), headed by Abdelhak El-Kafsi and which is one of the first Islamic finance consultancy to be set up in the industry.
The five-year Sukuk which closed at end July was over subscribed by $100 million but it was decided to close the issue at its target level. According to Tabreed, this was the first-ever UAE rated corporate bond issue, having been assigned a BBB- rating (the same as that of Tabreed) by Standard & Poor’s (S&P), the international rating agency.
According to IFC, some of the unique features associated with the issue include: the provision of asset backing for 33.34 percent, whilst Tabreed had less than 25 percent of unencumbered assets to include under the Sukuk; and a coupon being payable during Istisnaa period. Traditional structures, stresses an IFC source, involve advance (therefore conditional) rental payments, which would cause a major problem with the rating if not resolved.
The proceeds from the Sukuk, according to the structurers, will be invested in tangible assets (i.e. existing plant or other assets, but not Istisnaa) which exceed a third of the total. This allows payment of coupons and trading in the Sukuk throughout its life, and also avoids the use of advance rentals, which from a credit risk perspective may have to be repaid in the event of non-delivery. Any other support tangible assets will carry a rating at least equal to the rating of Tabreed.
The Sukuk is also one of the first to be listed on the London Stock Exchange and has a margin of 125 basis points over six-month LIBOR (London Inter-bank Offered Rate). The KIC issue, albeit it is relatively small, is potentially more important given that it is the first in a series to be issued by the company, which is a leading provider of housing finance in the Kingdom. Demand for housing finance in Saudi Arabia is increasing rapidly given the country’s young demography with 55 per cent of the population under the age of 20 years.
It is also important from a Saudi legal and Shariah perspective. According to Mohammed Al-Sheikh, lead partner advising on the issue and co-head of international law firm, White and Case’s Islamic Finance Unit in the Kingdom, “this securitization has broken new ground from a legal and Shariah structuring perspective and paves the way for future Sukuk transactions in the Kingdom of Saudi Arabia.” The Sukuk transaction, stress the lead managers, is the first true-sale securitization in the Gulf Cooperation Council and is backed by $23 million of Ijara and Istisnaa contracts, providing an off-balance sheet alternative source of funding to KIC as well as a Shariah-compliant, fixed-income investment product (akin to a mortgage-backed security) to GCC and international capital markets.
The Sukuk has an A-rating from Capital Intelligence, the international rating agency specializing in the emerging markets. The transaction also attracted an undisclosed “innovative mezzanine credit enhancement, taking the form of a standby murabaha facility” from the International Finance Corporation (IFC), the private sector financing arm of the World Bank Group. This once again illustrates the globalization of Islamic finance structures such as the Sukuk. The KIC issuance also carries credit enhancement from Saudi Arabia’s Dar Al-Arkan Real Estate Development Company of Saudi Arabia.
The emergence of the Sukuk market in Saudi Arabia was well explained by Mohamed Al-Mady, SABIC vice chairman and chief executive officer, at the launch of the corporate’s issuance: “With this debut issuance, SABIC is pleased to have led the way in opening up the non-equity capital market sector in the Kingdom. We are gratified that we were able to achieve our key objectives with this transaction, namely further development of the Kingdom’s capital markets and providing investors with greater investment choice, and the first step in diversification of our funding sources.”
