Islamic Banking-r1:AMM grid in qxp 12/24/09 9:48 AM Page 72
ISLAMICFINANCEFOCUS
“Inasense,defaultsinatypeoftransactionrevealthe
THENEAR-DEFAULTOFDUBAI
actualrightsheldbyinvestorsinthattypeoftransaction,”
saysAymanAdelKhaleq,partneratVinson&Elkinsin
SheikhAhmadBinSaeedAlMaktoum,thechairmanoftheDubai
Dubai.“Pureeconomicsaside,thedefaultsfacingvarious
SupremeFiscalCommitteeanduncleofDubai’sruler,hadsome
sukukinthecurrentmarketare,therefore,notentirely
soothingwordstosaywhenheannouncedthe$10billionbailoutof
negativeoccurrences.”
DubaiWorldonDecember14.
Thesamesentimentwasechoedallovertheworldin
Therewastalkof“ourstrongcommitmentasaglobalfinancial
theweeksuptoAbuDhabi’sintervention,whenadefault
leadertotransparency,goodgovernanceandmarketprinciples”.
hadlookedtobeonthecards.
Hewantedto“reassureinvestors,financialandtradecreditors,
“Nakheelwillbeanopportunitytosetsomeimportant
employeesandourcitizensthatourgovernmentwillactatalltimes
precedents.Firstandforemost,wearegoingtohaveabet-
inaccordancewithmarketprinciples”.Andhepromisedthat“our
terunderstandingofwhatthepathisgoingtobelikepost-
bestdaysareyettocome”.
default,”wastheviewofDinoKronfol,managingdirector
Thatissomethingofanunderstatement,giventhatthetwo
atAlgebraCapitalinDubaiandoneofthefewGulfasset
weekspriortohisstatementcouldwellrankamongDubai’sworst.
managerstorunamutualfundinvestingexclusivelyin
Creditandstockmarketsworldwidemayhavebeengladtosee
sukuk,shortlybeforeDubaiwasbailedout.
AbuDhabihelpoutitscousinstate,butfewwillforgiveDubai’s
ThreethousandmileseastinMalaysia,BadlisyahAbdul
conductinahurry.Thatisgoingtomatterwhenitcomesto
Ghani,CEOofCIMBIslamicBank,alsobelievedaDubai
refinancingitsotherdebt.
defaultwouldhavepositives:“There’salwaysasilverlin-
Oneofthebiggestcomplaintsthatcameafterthe
ing.Whatishappeningnowwillmakethemarketeven
announcementofthestandstillwasthatpeoplefeltmisled:they
strongerinfuturebecauseitwillcausepeopletobuildthe
hadassumedthestatewouldstandbehinditssubsidiary
necessaryframeworkandinfrastructuretomakesurethese
companies.
thingsdonothappenagain.”
Infact,the237-pageprospectusforthecompany’ssukuk
Dubai’sabilitytoleanonAbuDhabi’srichesinthelast
containsnomentionofstatebacking,whichhasledtoquestions
instancemayhavesaveditsomeblushes,butitalsoside-
aboutthewisdomofinvestorsandratingagenciesintheir
steppedauniquechancetolearnmeaningfullessonsabout
assumptionofit.
investorrightsintheworld’ssukukmarket.
“AstherewerevariousriskfactorslistedintheNakheelsukuk
prospectus,aclearstatementthatDubaiWorlddependsonits
WHEREDOESTHEBUCKSTOP?
subsidiaries,andnonegivinganyindicationthattheEmirateof
Partofthecurrentuncertaintyoversukukdefaultsisdueto
DubaiwouldcoverNakheelincaseofinsolvency,theoriginalrating
theverynatureofthedebt.
basedonimplicitsovereignsupportseemstobeexaggerated,”says
Theprincipleofasukukisthatitreplicatesthemechan-
MichaelSalahGassner,abankerandfounderofthewebsite
icsofaconventionalbondinaShariah-compliantway.In
islamicfinance.de.
Islam,riba,orinterest,isprohibited:moneycannotjust
That’strueonpaper.Butwhatmuddiedthewaterswasthe
turnintomoremoneywithoutdoingsomethingelse.Toget
apparentstatementofleadershipfiguresrightuptoSheikh
aroundthisprohibition,sukukusethecashflowsofan
Mohammed,emirofDubai,intheweeksbeforethestandstill
underlyingasset–typicallyaproperty–whichpayoutan
announcement.
incomestream.
“AfewweeksagoSheikhMohammedpubliclysaidtheDubai
InthecaseofNakheel,whichhasthreeseparatesukuk
economywasingoodshapeandhedidn’texpectanymore
worthUS$5.25billionmaturingbetweenDecember2009
problemsforit,”saysDouglasHansen-Luke,CEOfortheMiddle
andJanuary2011,itbaseditsdealsoffofa50-yearlease-
EastatRobecoinBahrain.“Iamsuretherearenorecordsanywhere
holdinterestintwoplotsoflandwithinDubaiWaterfront.
ofhimexplicitlyguaranteeingthedebtofcompaniesinwhichheis
Inasukuk,thereturnisashareofprofitsamongthecredi-
thelargestshareholder.Butatthesametimetherearenoexplicit
tors.
statementsuntiltheselasttwoweeksthathewouldnotstandby
Butifasukukgoeswrong,it’snotclearwhatrights
them.Anditwouldcertainlybetruetosaythatthevastmajorityof
creditorshavetotheunderlyingassets.
theinvestmentcommunitythoughttheywerealmostparipassu.”
Unlessit’sspecificallystatedinthedocumentation,a
Intheend,thesukukwassupported.Butinvestorsremain
creditor’srightisnottypicallytothatcash-generatingasset
infuriated.Theyareparticularlyupsetthatthestandstillonthe
–whichistherechieflytoensureShariahcompliance–but
sukukrepaymentwasannouncedimmediatelybeforeafour-day
totheobligor’sbalancesheet,whichcanbeaverydifferent
publicholiday.Itmeantthatuncertaintyandrumourdroveworld
proposition.
marketsuntilDubaigotbacktowork.
Theethicalstanceofasukukisalsomeanttoreflect
Additionallythebailout,whenitcame,wasamatterofhours
equalsharingofprofitandrisk.Andcurrentlynobodyis
beforethesukukwouldhaveenteredtechnicaldefault.Itwas
certainwhetherthisprincipleofequalsharingalleviates
cuttingitfine,tosaytheleast.
anyobligationtheborrowerhastocontinuetopayaneffec-
Investorsdon’tlikethosesortofwhite-knucklerides,
tivedividendtoitsinvestorsifitfeelsitcannolongerdoso.
particularlyonwhattheythoughtwasstate-backedpaper.Many
“Untilrecentlythegrowthofthe sukukmarkethasbeen
willdoubtlessthinktwicebeforerushingbacktoDubai.
drivenmorebyanabundanceoffinancialresourcesthan
“Thedirectimpactofthestandstillandtherelativelysmall
by,forexample,regulatoryorlegalconsiderations,”says
amountofmoneyinvolvedismuchlessimportantthantheimpact
Khaleq.“Inconventionalfinanceandinvestmentmarkets,
onperceptionandcredibility,”saysHansen-Luke.
thepost-defaultpathiswellworn.”
Consequently,whenaconventionalbondisstructured
anddocumented,thearrangersandinvestorscantakeinto
72 DEC2009/JAN2010 ASIAMONEY
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