THE Jeddah-based Islamic Development Bank (IDB), the multilateral development bank of the 57 Muslim countries, will embark on a series of road shows for its proposed sukuk MTN (medium-term note) program in early September 2009 which would include the GCC (Gulf Cooperation Council) region, Kuala Lumpur, London, Hong Kong and Singapore.
Although the legal documentation and the ratings for the proposed sukuk have been in place since the beginning of August, it was decided to delay the marketing of the sukuk to September, according to an IDB source. On the advice of the three mandated lead arrangers, HSBC, Deutsche Bank and BNP Paribas, and the two co-lead arrangers, CIMB of Malaysia and Bank Islam Brunei Darussalam, IDB decided to launch the road shows for the sukuk in early September because of the onset of Ramadan and the fact that many senior bankers and investors especially in the Middle East region, are traditionally on holiday during August.
In fact, Moody’s Investors Service, the international credit rating agency, last week confirmed the assigning of an AAA rating, with a stable outlook, to the IDB’s proposed sukuk MTN program, which is similar to the long-term foreign currency rating assigned to the IDB’s ordinary capital resources. The proposed sukuk MTN would be the latest tranche under the IDB’s planned $6 billion sukuk MTN program which is partly aimed at helping member countries mitigate the impact of the global financial downturn and the rise in commodity prices. Although figures ranging from $500 million to $1.5 billion have been bandied around for the size of the sukuk, the final decision, according to the IDB source will depend on the market demand for the issuance, the tenor, and the offered pricing and yields. Given the Triple A rating of the sukuk, the MDB of the Muslim world expects robust demand for the offering. As an issuer, the IDB, according to the source, has a 100 percent sovereign ownership and support; a robust and well-diversified asset portfolio; a very well-capitalized and financial self-sufficiency; conservative risk management principles; zero percent risk weighting (Basel II) and “AAA” rating from all three major agencies. It is also an emerging, supranational borrower in global fixed income markets; a leader in developing/promoting Islamic financial markets; and has a stable funding program across a broad-based product suite. Under the proposed IDB sukuk MTN structure, trust certificates will be issued by IDB Trust Services Ltd., a Jersey-based special purpose vehicle (SPV). The net proceeds of the issue of such certificates will be used to purchase a portfolio of sukuk assets, which may comprise Ijara (leasing) assets, Murabaha receivables, Istisna receivables and the IDB’s own portfolio of equity and sukuk investments.
According to Moody’s, the UDB Sukuk MTN certificates are senior unsecured obligations, without any preference or priority, among all trust certificates of the same series and with all other present and future trust certificates.
The capital base of the IDB is very strong. The IDB is a highly liquid MDB institution with an authorized capital of $46.32 billion; a subscribed capital of $23.277 billion of which $5.094 billion has been paid up and of which $16.521 billion is callable. The IDB at its 34th annual board of governors meeting in June 2009 in Ashgabat, Turkmenistan, announced that its operational financing would increase by 30 percent per annum over the next three years and by 15 percent per annum thereafter.
Its board of governors also agreed to raise the bank’s subscribed capital by a further 7 percent and paid-up capital by 10 percent. The IDB is expected to raise its paid-up capital by 650 million Islamic dinars over the next two years. The total IDB funding requirement over the next five years is estimated at $5 billion. The MDB aims to raise funds from the market to diversify its long-term source of capital and to reduce dependence on equity subscriptions.
According to Moody’s, the IDB’s usable equity (paid-in capital plus total reserves) exceeds its total operational assets and equity investment, and its risk asset coverage ratios generally compare favorably with other MDBs. Despite a risky operating environment, inherent in its role as a development bank, the IDB’s operational assets continue to perform well, with a very low level of impairment. Moreover, says Moody’s, the most risky portion of the bank’s operational assets (those extended to the poorest member countries on a concessional basis) will gradually be transferred to a stand alone new poverty reduction fund, the Islamic Solidarity Development Fund.
The IDB’s capital markets strategy, according to Mohamed Tariq, head of treasury, is aimed at developing a liquid securities market in the Islamic finance industry as part of IDB’s wider strategic objectives; enhancing the multilateral development bank’s profile in the international capital markets; and the creation of eligible assets that can be used as asset backing for the trust certificates (sukuk).
