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Middle East Report 2009| pfi| 17

Sun Finance adhered to the new standard by featuring partial recourse

The sukuk al-mudaraba al-muqayyada certificates were backed by scheduled instalment payments owed by sub- developers arising from the sale of plots of land on the Shams and Saraya developments that are taking place on a natural island off the coast of Abu Dhabi city. The structure benefits from over-collateralisation, sub- ordination, an enforcement reserve fund, a liquidity reserve fund and an infrastructure reserve fund. The trans- action was notable for a number of reasons. It was the first Islamic securitisation of land and asso- ciated rights to payment and It is backed by freehold title to the land, in the form of an instalment sale contract that is secured by land. Perhaps more importantly, it was the first full Sharia-compliant deal structured according to the latest guidelines.

Sukuk pipline

Four factors were to blame for pushing the value of sukuk issuance in 2008 down by 56%: global market turmoil, drying up of liquidity, widening of cred- it spreads, and investors' wait- and-see attitude, according to a Standard & Poor's report in Jan- uary, which claimed the market would remain dormant until at least H2 2009. A Fitch Ratings report predicted a similar time- frame of inactivity for GCC sukuk in the key construction and property sector. By Mark Kolmar.

Mohamed Idriss, managing director and head of global mar- ket sales for MENA at Nomura, suggests a glut of sukuk could hit the market when the time is right. "We would expect activity to pick up in late 2009, by which time there will be a backlog of issuances and activity levels could return very quickly," he says. "The sovereigns and quasi-sovereign entities will be first, followed by private sector corporates, some of which will be delayed by having to attain ratings first."

Aside from macroeconomic improvement, the sukuk sector

is itself still developing and structural improvements will enable greater activity. Karim Nassif, Standard & Poor's credit analyst, prioritises standardisa- tion as a means to boost sukuk issuance, saying: "Standardised loan documentation would reduce the time and costs of due diligence. The market would also benefit from a harmonisation of views amongst scholars." Dubai Financial Market is expect- ed to announce a set of stan- dards for sukuk issuance in the Emirate by the end of May. Below are the major deals in the pipeline.

Bahrain has mandated Caly- on, Deutsche Bank and HSBC to lead its US$500m sukuk offer- ing, planned for late May. The new offering will be the first issue under a US$800m pro- gramme to fund housing proj- ects and plug the Kingdom’s budget deficit. The second stage will be a dinar-denominated three-year BD250m (US$663m) issue. The timeframe for the sec- ond issue, and whether it will be a conventional or Shariah-com- pliant offering, is as yet

unknown, although a sukuk issue is likely given the poten- tially wider market at a time of low liquidity.

Bahrain last visited the bond market in March 2008 when it printed US$350m of Reg S five- year sukuk at 75bp over Libor, having attracted about US$800m in investor commitments. Unicorn Investment Bank wants to issue US$425m of ijara- structured sukuk by the end of Q3, and has begun discussions with two regional banks about running the issue, which would be used to fund the bank's expan- sion. Unicorn is targeting a num- ber of banking acquisitions in the next few months in the Gulf, Asia and Europe.

Islamic Development Bank (IsDB) has confirmed that the first US$500m sukuk under a US$5bn five-year programme will be launched by the end of June. The bank wants to raise US$1bn a year from the sukuk market to fund its projects in member countries. The pro- gramme will be US dollar/euro- denominated, with the first issue to be in US dollars.

IsDB has already printed one small sukuk issue this year as part of its Malaysian ringgit- denominated programme. It issued M$100m (US$27.2m) of AAA rated five-year sukuk through Standard Chartered with a coupon of 4.05% in late March.

Jabal Omar Development Company will ask shareholders to approve a sukuk issue at an EGM on June 10. In April, Jabal Omar admitted that it had been unable to secure SR12.4bn (US$3.3bn) of project financing to fund a real estate development in Makkah. The firm cancelled the mandate it had awarded to Jadwa Investment Company last July to raise the funding for a real estate development of 39 resi- dential and hotel towers opposite the Grand Mosque in Makkah. Emaar Properties has appoint- ed HSBC and RBS as leads on a US$2bn sukuk programme, although no timeframe is known. Alongside the sukuk will be a US$2bn Euro medium-term note programme, on which HSBC has been appointed lead manager.

In early 2008, the sukuk market suffered a setback when a senior Islamic finance scholar voiced concern over the Sharia legality of some specific forms of issuance.

In contrast to past full-recourse deals, Sun Finance adhered to the new standard by featuring partial recourse to the originator. It was also notable for being the first sukuk issue to deliver subordination, being structured into a Senior A class and two further subor- dinate B and C classes.

A few months before the Sun Finance transaction, Merrill Lynch arranged an issue for Villamar Sukuk. This deal was notable for being the first fully non-recourse asset-backed real estate issue for the Islamic market.

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