Sukuk

English: Islamic bond (Plural. Also see Saak.)

Definition: An asset-backed bond which is structured in accordance with Shariah and may be traded in the market.

A Sukuk represents proportionate beneficial ownership in the underlying asset, which will be leased to the client to yield the return on the Sukuk.

IFN Weekly Market Roundup: 18th February – 24th February 2017

The week brought in promising head starts and prospective outlooks as the end of the second month of 2017 draws closer. In a span of seven days, we witnessed Hong Kong dominating the sovereign Sukuk space; Malaysia taking up the corporate sector; more banks looking to a future in compliant products and services; regulators and authorities collaborating to increase global Islamic finance standards; and industrial moves and strategical reshuffles mostly from banks and insurance companies.

SOVEREIGN SUKUK
The government of Hong Kong extended its Sukuk curve with a US$1 billion 10-year tenor Reg S Sukuk facility; its previous two issuances were for five years. The paper, priced at 3.13%, was almost twice oversubscribed, with orders worth US$1.72 billion 
Saudi Arabia called for proposals from banks for its potential US dollar Sukuk, according to Reuters quoting unnamed sources. Citibank, HSBC and JPMorgan will be acting as the global coordinators. Bank of China, BNP Paribas, Deutsche Bank, Goldman Sachs, Morgan Stanley, MUFG and NCB Capital are reported to be involved.

Oman mandated Alizz Islamic, Citibank, Dubai Islamic Bank, Gulf International Bank, HSBC, JPMorgan and Standard Chartered to manage a Sukuk sale worth approximately US$1.5 billion to US$2 billion, as reported by Global Capital.

NON-SOVEREIGN SUKUK
The corporate issuance space was dominated by Malaysia throughout the week. YTL Power International proposed a RM2.5 billion (US$561.04 million) Sukuk Murabahah facility to fund the equity contribution of a 1,320 MW coal-fired power plant in Indonesia and a 470 MW oil shale power plant in Jordan. 

IFN learned that the Malaysian Ministry of Finance is evaluating a Sukuk plan by Malaysia Debt Ventures (MDV). SapuraKencana Petroleum announced the signing of seven-year multicurrency financing facilities approximately worth US$1.5 billion with a range of Malaysian, regional and international banks, involving an issuance of approximately RM3.6 billion (US$806.78 million) of unrated Sukuk. 

Tanjung Bin Energy Issuer  passed a resolution to refinance a junior term financing facility during an extraordinary general meeting with Sukukholders of a Sukuk Murabahah program of up to RM4.5 billion (US$1.01 billion).

In the Gulf, Qatar Islamic Bank obtained approval from its ordinary general assembly to raise the limit of its perpetual additional Tier 1 Sukuk from QAR5 billion (US$1.37 billion) to QAR7.5 billion (US$2.06 billion), which also approved a recommendation to distribute a 47.5% cash dividend. 

Turkey’s Eximbank announced its plans to develop a credit rating system and Sukuk among others by the end of 2017, according to Anadolu Agency.

REPORTS
In its latest report, the IMF called for the Islamic banking industry to establish a policy framework and environment that promote financial stability. The global foundation also encouraged increased efforts to diversify the sovereign Sukuk markets.

The World Bank Group and the IDB announced the publication of a global report on Islamic finance subtitled ‘A Catalyst for Shared Prosperity?’ The report discusses trends in Islamic finance, identifies major obstacles in the industry and recommends policy interventions to boost the market. 

BANKING AND FINANCE
In Africa, The Popular Credit of Algeria Bank is planning to venture into Shariah compliant financing from 2018 onwards, according to its CEO as reported by local media.

In the Middle East, Warba Bank announced its plan to raise the allocated amount of the acquisition of financing portfolios from Al-Mulla International Financing from KWD30 million (US$97.99 million) to KWD50 million (US$163.32 million). Alizz Islamic has launched new Shariah compliant commercial financing products for salaried customers. Saudi-based Middle East Paper Company reached an agreement with Saudi British Bank to renew its Islamic credit facilities, according to a bourse filing. 

In Asia, Bank of Maldives Islamic established its first home construction and real estate financing facility, according to Dr Aishath Muneeza, IFN Correspondent and the chairperson of the Maldives Center for Islamic Finance. Pakistan’s Securities and Exchange Commission approved the prospectuses of two new Modarabas: Habib Metro and Orient Rental.

LEGAL FIRMS
Norton Rose Fulbright and Chadbourne & Parke confirmed that both firms will be merging in the second quarter of 2017. The firm will adopt Norton Rose Fulbright’s name after the merger.

COLLABORATIONS
The Dubai Financial Services Authority has inked an agreement with the European Securities and Markets Authority as an effort to share information and increase partnership in Dubai International Financial Center-based central counterparties’ compliance with the European Market Infrastructure Regulation’s conditions. 

Borse Dubai, the parent company of Dubai Financial Market, and NASDAQ signed a technology deal to boost the infrastructure of Dubai’s stock exchanges. Under the agreement, NASDAQ would be providing a new INET-powered, multi-asset trading technology engine called NASDAQ Matching Engine; a cash equities clearing module called NASDAQ Packaged Clearing; and enabling an in-memory-vetting model on the central securities depository solution under the new NASDAQ Financial Framework architecture. 

Audit regulators under the ASEAN Audit Regulators Group (AARG) comprising Malaysia’s Audit Oversight Board, Indonesia’s Finance Professions Supervisory Center, Singapore’s Accounting and Corporate Regulatory Authority and Thailand’s Securities and Exchange Commission; and the four largest audit firms in the region comprising Deloitte Touche Tohmatsu, EY, KPMG and PwC, agreed to work toward achieving a reduction of at least 25% in the number of listed companies’ audits with inspection findings. AARG also announced that the World Bank’s Center for Financial Reporting Reform is collaborating with experts from the East Asia Pacific region of the bank’s Global Governance Practice to secure funding and provide technical assistance to enhance audit oversight in the member nations. 

ASSET MANAGEMENT
KBW Investments launched Crestmount Capital which focuses its funding on Shariah compliant investments. The company also announced that Crestmount Fund I, its premier Shariah compliant real estate investment fund, achieved the full subscription of AED267 million (US$72.68 million).

QInvest exited from the St Edmund’s Terrace LP Fund, a Shariah compliant London residential real estate fund.  

TAKAFUL 
Zurich Takaful Malaysia launched Takaful SeniorGold, a Family Takaful plan, offering coverage to senior citizens. 

Bahrain Kuwait Insurance Company (BKIC) is set to purchase Bahrain Islamic Bank’s entire stake in Takaful International Co.

MOVES
Qatar Islamic Bank has appointed new board members and elected Sheikh Jassim Hamad Jassim Jaber Al Thani as the bank’s chairman and Abdullatif Abdulla Al Mahmoud as the vice-chairman; Bank Nizwa has elected acting CEO Khalid Al Kayed as its CEO; SHUAA Capital has appointed Hisham Al Rayes to replace Hamad Al Sagar who resigned from the board of directors; Dr Ghassan Abdulrahman has resigned from the board of Malath Cooperative Insurance and Reinsurance Company; Fitch Group has appointed Ian Linnell as the president of Fitch Ratings; and Slaughter and May, elected Dan Schaffer as its new partner in the firm’s Pensions and Employment Group.

Dana Gas may restructure Sukuk repayment

UAE: Investors of Dana Gas’s US$700 million Sukuk expect the company to restructure the repayment of the Sukuk facility and extend its maturity, as it is falling sharply in the secondary market, with the cash price dropping 3 cents on the dollar since the beginning of the year to 87 cents, Reuters reported. Yield, meanwhile, has jumped to 26.32% from 18.5% at the beginning of January. The company had around US$300 million in cash and bank balance at the end of 2016, according to its preliminary full-year results – less than half the looming Sukuk maturity.

 

RAM rates Maybank Islamic’s program

MALAYSIA: RAM has assigned ‘AAA/Stable/P1’ ratings to Maybank Islamic’s proposed RM10 billion (US$2.24 billion) Islamic commercial paper/medium-term note program, according to a statement. The proceeds will be used for Shariah compliant funding purposes, and the rating agency has also reaffirmed the bank’s ‘AAA/Stable/P1’ financial institution ratings as well as the ‘AA1/Stable’ rating on its RM10 billion subordinated Sukuk Murabahah program (2014/2034).

 

Oman picks banks for Sukuk sale

OMAN: Oman has named Alizz islamic, Citibank, Dubai Islamic Bank, Gulf International Bank, HSBC, JPMorgan and Standard Chartered to manage a Sukuk sale that is expected to be around US$1.5-2 billion in size, Global Capital reported, quoting two unnamed sources.

Sovereign Sukuk: Looks promising against setbacks

The month of February has seen a number of important issuances and announcements in the sovereign Sukuk market. 

A number of sovereigns completed domestic Sukuk issuances this month; the government of Iran issued domestic Sukuk worth IRR3 trillion (US$92.52 million) in aggregate, through the Ministry of Economic Affairs and Finance and the Ministry of Cooperatives, Labor and Social Welfare; while the Central Bank of Bahrain also issued an oversubscribed short-term Sukuk facility earlier in the month. In Asia, the government of Indonesia sold a total of IDR7.57 trillion (US$567.75 million) of Sukuk to finance the 2017 State Budget (with a further target of raising capital in the region of IDR6 trillion (US$448.8 million) planned), while the government of Malaysia also issued domestic Sukuk worth RM4 billion (US$897.64 million). 

The big issuance of the month, however, was the US$1 billion Sukuk facility by the Investment Corporation of Dubai (ICD), the Dubai government’s main investment arm. The Sukuk facility was listed on NASDAQ Dubai and it was reported that the orderbook for the issuance exceeded US$1.5 billion. The Hong Kong government will also shortly be issuing another US dollar Sukuk, with a potential size of US$1 billion. 

These promising issuances were, however, set against a backdrop of the postponement of two key potential issuances; according to the deputy finance minister for the public treasury of Egypt, the planned Egyptian sovereign issuance has been delayed to the next fiscal year. According to Bloomberg, Saudi Arabia is also unlikely to issue its inaugural Sukuk in the first quarter of 2017, following the departure of the Kingdom’s head of the debt management office. According to Reuters, however, the lead managers of Dubai’s previous bond issuances have now pitched for a new mandate with the Dubai government which is anticipated to raise at least US$500 million from the international debt capital markets in the first quarter this year.

Hamed Afzal is a senior associate at King & Spalding. He can be contacted at hafzal@kslaw.com.

SapuraKencana to issue Sukuk

MALAYSIA: SapuraKencana Petroleum has announced the signing of a seven-year multicurrency financing facilities amounting up to approximately US$1.5 billion with a consortium of Malaysian, regional and international banks. According to a press release, the proceeds from the facilities shall be used to partially refinance the company’s existing borrowings. The refinancing involves an issuance of approximately RM3.6 billion (US$806.78 million) of unrated Sukuk under the existing 30-year multicurrency Sukuk program of up to RM7 billion (US$1.57 billion) in nominal value. Maybank Investment Bank is the coordinating bank for the refinancing exercise.

 

MDV Sukuk under consideration

MALAYSIA: IFN has learned that the Ministry of Finance is currently evaluating a Sukuk plan by Malaysia Debt Venture (MDV). MDV announced last August that it intends to raise up to RM1 billion (US$224.16 million) through Sukuk. More details will be revealed in due time.

IMF calls for Islamic banking to promote financial stability

GLOBAL: The IMF has called for the Islamic banking industry to establish a policy framework and environment that promote financial stability and sound development, including legal, prudential, financial safety nets, anti-money laundering and countering the financing of terrorism and liquidity management frameworks. Contained in the staff paper titled ‘Ensuring Financial Stability in Countries with Islamic Banking’, the IMF also called for increased efforts to deepen the government Sukuk markets and the importance of having in place relevant central banking liquidity facilities and instruments.

 

Indonesia’s sovereign Sukuk oversubscribed

INDONESIA: The government of Indonesia’s sovereign Sukuk (SPN-S 08082017 and four project-based Sukuk series) auction on the 21st February received total incoming bids of IDR10.39 trillion (US$777.17 million), according to an official announcement. The government raised a total of IDR6.02 trillion (US$450.3 million) from the five Sukuk series offered, which will be used to finance the 2017 State Budget.

 

Saudi calls for banks’ proposals for Sukuk

SAUDI ARABIA: Saudi Arabia has requested for proposals from banks for its potential US dollar Sukuk, according to Reuters quoting unnamed sources. The government has approached lenders which had worked on Saudi’s first issuance. Citibank, HSBC and JPMorgan will be acting as the global coordinators. Bank of China, BNP Paribas, Deutsche Bank, Goldman Sachs, Morgan Stanley, MUFG and NCB Capital are also reported to be involved.

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