This page contains a Flash digital edition of a book. Sukuk Awaiting

ith their underdeveloped and shaky legal systems, investing in corporates in Middle Eastern coun- tries is always a riskier proposi- tion than investing in the US or Western Europe. This is not con-

fined to sukuk. Conventional debt financings of Middle Eastern corporates tend to be expensive, relative to the size of the company. In July, Kuwait Projects Company , despite its strong sovereign links, paid 99.20 for 10-year bonds. More recently, in October, Qatar Telecom priced a six-year deal at 99.24, and a 10-year at 99.16. Investors in the Middle East require compensation for the weak legal structures in these countries, which can make any default a potential minefield. But the uncertainty associated with sukuk is even greater. Although there have been three high-profile defaults from the Gulf Co-operation Council in recent months, none has yet been successfully restructured. There is no precedent of a legally enforced sukuk restructuring in the region to help facilitate such an agreement.

Sukuk workouts will be determined by the decisions taken in their home jurisdictions, regardless of whether they are officially subject to UK or any other country’s laws. Even if a London court gave the green light to investors to seize the assets of, for example, a Kuwaiti or Saudi com- pany, the courts of those countries would be unlikely to enforce those judgements, rendering them meaningless. The uncertainty surrounding sukuk is likely to encour-

age investors to push for a higher premium to buy them. With different countries in the Middle East having dif- ferent attitudes to international financial markets and investors’ rights, the affect will vary between countries. Sukuk that are in restructuring in Kuwait are likely to experience very different outcomes to those to be restruc- tured in Saudi Arabia, said Ahmad Alanani, director of fixed income sales at Exotix in Dubai.

A wave of sukuk defaults has called into question the integrity of an asset class that many had assumed was gold-plated. But despite at-times hysterical media coverage, the asset class is in the midst of a very normal maturing. Solomon Teague reports.

Middle East Report 2010| pfi| 9

sukuk clarity W

“There’s already a hierarchy in the perception of sukuk

deals,” said Alanani. “The United Arab Emirates offers more comfort than Kuwait, and Kuwait offers more comfort than Saudi Arabia.”

Kuwait has seen a number of high-profile defaults in recent months: International Investment Group default- ed on its sukuk in April; while Investment Dar was the first company to pursue a restructuring under Kuwait’s Financial Stability Law. Kuwait is perceived to have the will to resolve the legal uncertainty surrounding sukuk, but the authority’s response has been lethargic. IIG defaulted on its US$200m sukuk in April and then again in August. But the situation will not be clear until there is a resolution on Investment Dar , which will set the precedent for other Kuwaiti companies to follow. Investment Dar managed to reach agreement among its creditors in June and submitted its proposal to the Kuwaiti court, which is considering the proposal. Investment Dar proposed an amortising schedule for its plan to term out restructured debt over five years, starting by September 30, with the first profit payment and first fixed amortisation payments due by March 31 2011 and Sep- tember 30 2011. The plan was approved by 80% its creditors. Saudi Arabia’s Saad Group default illustrates the sig- nificant uncertainty facing investors in that country. Since March, local sources have revealed that the company will not propose a restructuring plan until freezing orders placed on it by various jurisdictions have been lifted, according to Citicorp, the delegate of its US$650m sukuk. Although holders of Saad’s Golden Belt 1 sukuk in Octo- ber agreed an indemnity plan with Citicorp, paving the way for a future retrieval of capital, that possibility seemingly remains a long way off.

“The Saad case is nowhere near being resolved,” said

Alanani. “Lawsuits have been filed in multiple jurisdictions only to be thrown out, shifting the case back to Saudi courts and putting the focus on SAMA. The situation is a black box.

Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36
Produced with Yudu -