MANAMA, 27 November 2007 — Islamic finance has the potential to make a major contribution toward funding the estimated $1 trillion of infrastructure projects expected to be carried out across the Middle East within the next decade.
However, there are several challenges relating to Shariah compliance and the enforceability of creditors’ rights in local courts that need to be overcome before these financings can be rated investment grade.
The complex financial structures of two recent sukuk issues and the potential for future projects to achieve investment-grade ratings are explored in detail in a new credit FAQ (frequently asked questions) published by Standard and Poor’s, the leading provider of financial market intelligence to customers in the Middle East’s credit risk and wealth management markets.
S&P’s Ratings Services has assigned ratings to two project-finance transactions that feature Islamic debt obligations, or sukuk, over the last 18 months: DP World (A+, stable, A-1) and National Central Cooling Company PJSC (Tabreed, BBB-, stable).
Both projects are linked to industrial companies based in the United Arab Emirates, and their sukuk structures involve funding that is asset based.
“Legal title over the assets being financed is not effectively available for either DP World or Tabreed, and, as such, lenders’ security is weaker than we would expect for standard project financings,” said Karim Nassif, credit analyst at S&P. “There is no distinct separation between the project owner’s financial troubles and the project itself.
“Under both sukuk, full bankruptcy remoteness has yet to be tested, and there is no diversification of counterparty risk as typically seen with project financings.” The Tabreed and DP World sukuk achieved investment grade ratings more for their structural features including enhancement and sovereign support, Nassif added, than for the economic fundamentals of the underlying transaction.
Meanwhile, A Dubai-based investment firm charged yesterday that a $4.96-billion initial public offering (IPO) by port operator DP World lacked transparency and requested a review.
“We think there was a lack of transparency” by the Dubai company in the allocation of shares to institutional investors, said Ali Al-Shihabi, CEO of Rasmala Investments, a few days after the close of the largest IPO in the Middle East.
“We were among the first firms invited to take part by two of the lead managers — Shuaa Capital and Deutsche Bank. We made a bid of $300 million at the top price,” he told AFP.
Rasmala said it was allocated no shares.
DP World had offered 17 percent of its 16.6 billion shares, with the possibility of expanding the offer to 20 percent.
But the amount was increased due to strong demand to up to 23 percent, or 3.82 billion shares, including an additional over-allotment option of 572.7 million shares.
The world’s fourth largest container-port operator gave an indicative price ranging between $1 and $1.30 per share at the launch of the IPO.
On Nov. 21, the company chose the top of the range figure as a price, putting its market capitalization at $21.6 billion.
DP World, which is controlled by the government of the booming UAE emirate of Dubai, became a top global port operator when it acquired Britain’s P & O in a $6.9-billion deal in 2006.
The company had said that a quarter of the shares was to be allocated to the holders of Islamic convertible bonds, while approximately 10 percent was to be allocated to retail investors.
The rest was expected to be divided equally between institutional investors in the region, Europe and the US.
“We have filed a request to the Dubai Financial Services Authority requesting a review... I encourage them to move quickly to bring total transparency,” Shihabi said.
Disclosure of the details of all parties allocated shares and the criteria used in the process would enhance transparency, he said.
“If we are going to build a good future of the financial market in the region, these issues need to be raised,” Shihabi added.
A DP World spokesman told AFP that the company “believes that the allocation process was properly managed and that it was a fair process,” declining to go into further details.
DP World Chief Executive Officer Sultan bin Sulayem told Al-Arabiya news channel yesterday that the distribution of shares between regional and foreign institutional investors was fair.
“Around 40 percent of the applications we received came from the region while around 60 percent came from abroad,” he said, adding that the shares were allocated accordingly.
Deutsche Bank, Merrill Lynch International, Millennium Finance Corporation and Shuaa Capital were chosen as lead managers of the IPO.
The company’s shares yesterday started trading on the Dubai International Financial Exchange.
