Opportunities & Trends in Islamic Finance - Euromoney

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expanded Table 1: to Largest more than Sukuks $5 billion, in 2007buoyedchiefly by a $2.5 billion dealThat was most graphically illustrated in June, when Malaysia’s stateISSUER COUNTRY TYPE AMOUNT (US$ MN)Aldar Properties United Arab Emirates Islamic Exchangeable Bond 2,530DP World United Arab Emirates Mudharabah 1,500Dubai International Financial Center United Arab Emirates Mudharabah 1,250Dana Gas United Arab Emirates Mudharabah 1,000Dar Al Arkan Saudi Arabia Sukuk Al Ijara 1,000Khazanah Nasional Malaysia Islamic Exchangeable Bond 850Nakheel United Arab Emirates Islamic Exchangeable Bond 750Dubai Islamic Bank United Arab Emirates Sukuk Al Musharakah 750Dar Al Arkan Saudi Arabia Sukuk Al Ijara 600National Industries Group Kuwait Mudharabah 475Source: IFIS, 19 December 2007announced in the summer by the Qatar Gas Transportation Company(Nakilat), to support the company’s acquisition of 54 new tankers fordelivery in 2010. With other borrowers such as Barwa Real Estate alsoannouncing plans to sell $800 million of Islamic bonds this year, Qataris likely to be one of the pivotal markets in the continued evolution ofthe sukuk market in 2008.Among other GCC economies, issuance of sukuk has remained modestin comparison with the recent explosion in the UAE. In Bahrain, for example,which since the 1980s has been a key location for the evolutionof the Islamic financial services industry, issuance in 2007 reached $973million, compared with $798 million in 2006. In Kuwait, meanwhile,volume in 2007 rose to $1.3 billion, up from a little over $1 billion theprevious year.Borrowers diversifyA number of other key trends emerged from the striking expansionin the sukuk market in 2007, led by issuance from the UAE. One ofthese was the continued diversification of the market, giving investorsexposure to a much broader range of the GCC’s fastest-growingcorporate names. Many of those corporate borrowers are categorizedby the ratings agencies as so-called government-related enterprises,giving investors exposure to credits that some regard as offering quasigovernmentrisk. Prominent examples include borrowers such as DIFCInvestments and the UAE utility, Taqa.Wholly privately-owned companies coming to the market for the firsttime in 2007, meanwhile, included those such as the Saudi Arabianconglomerate, the Saad Group, which generated demand of more than$900 million for its debut transaction led in May by BNP Paribas. Thatstrong demand allowed for the five-year deal, originally planned as a$350 million-500 million issue, to be upsized to $650 million.Another important trend that was especially conspicuous in the firsthalf of 2007 was the continued diversification of the investor base forsukuk. In the early stages of the market, the lion’s share of sukuk wasgenerally placed with ‘domestic’ or regional investors. While the Malaysianmarket has remained predominantly a domestic one, its borrowershave enjoyed notable success in tapping an increasingly internationalmarket.investment holding company, Khazanah Nasional, launched itsgroundbreaking $850 million sukuk exchangeable into a 15% stakein the toll road operator, PLUS Expressways. Led by CIMB InvestmentBank, Deutsche Bank and JP Morgan, the Khazanah transaction wasincreased from its originally planned $600 million when it generatedorders of more than $7.8 billion. Much of that demand was accountedfor by convertible funds from Europe.Global investors targetedSukuk issuance from the Middle East has also increasingly beentargeted at a global investor community. For example, an importantlandmark for the market was passed in June 2007, when BarclaysCapital, Citigroup, Deutsche Bank and Dubai Islamic Bank led a highlysuccessful $1.5 billlion sukuk Al Mudabarah transaction for DP World.This was an integral part of a $3 billion funding programme allowingDP World to refinance its existing debt, and broke new ground for beingthe first sukuk to be documented to ensure compliance with RegS and US 144A standards. According to a deal analysis published byDubai Islamic Bank, that made the DP World issue the first of its kind togive US accounts the opportunity to invest in UAE corporate securities.In total, according to the same analysis, 33% of the transaction wasplaced in the US, with a further 15% in Europe, 8% in Asia and 8% in theUK, with only 36% distributed in the Middle East.Table 2: 2007 Sukuk BookrunnersRANKING BOOKRUNNER AMOUNT (US$ MN) ISSUES1 CIMB Islamic 5,323 272 HSBC Amanah 3,808 143 Barclays Capital 2,479 64 JP Morgan 2,033 35 Deutsche Bank 1,980 66 Citigroup 1,762 57 Dubai Islamic Bank 1,102 78 Riyad Bank 1,050 19 Standard Chartered Bank 1,001 1610 Credit Suisse 960 2Source: IFIS, 19 December 2007
The growing diversification of the investor base for Islamic securities in2006, which gathered momentum in the early months of 2007, turnedout to be something of a double-edged sword. International investorsbecame increasingly nervous about committing funds to newcorporate issuance as the credit crunch tightened its global grip in thesecond half of 2007, which had an inevitable knock-on impact on thesukuk sector at both the primary and secondary level. Issuance of newsukuk slowed in the second half of the year, while spreads of thoseinstruments that had been widely placed among international investorswidened. That widening, bankers in the Middle East rightly insisted,was purely a reflection of global liquidity flows, rather than of any shiftsin the underlying credit quality of issuers in the sukuk space. After all,buoyed by high oil prices and economic diversification, growth in theInfrastructure prospectsLooking to 2008 and beyond, there is a growing belief that one of themost exciting areas for Islamic finance will be as a means of financing thegigantic infrastructure investments that are now either being implementedor are on the drawing board throughout the Middle East. Estimates ofthe total investment that will be channelled by public and private sectorinvestors into infrastructure in the Islamic world vary, but a recent reportpublished by the Dubai-based Abraaj Capital describes the requirementin the Middle East, North Africa and South Asia as “nothing shortof spectacular”. The Abraaj report says that “in the first half of 2006, theMiddle East, for the first time in its history, became the largest source ofinfrastructure related project finance in the world, accounting for $33 billion,or one dollar for every three that was raised in the industry globally”.“One of the most exciting areas for Islamic finance will be as a means offinancing the gigantic infrastructure investments that are now either beingimplemented or are on the drawing board throughout the Middle East”Middle East in general and the GCC in particular continues to outpacemost of the rest of the world.Over the coming decade, adds the Abraaj analysis, the MENSA regionwill call for infrastructure investment of more than $630 billion acrossa number of key economic sectors. Power and utilities will account forOne notable positive by-product of the growing risk averseness ofglobal investors in the second half of 2007 was the increased flexibilityof borrowers in the sukuk market. In the case of a transaction launchedin November by the Jebel Ali Free Zone (JAFZ), led by Barclays Capital,$155 billion of this huge total, with the other areas identified as havingsubstantial investment requirements including water ($133 billion),healthcare ($49 billion), education ($18 billion), transportation ($188billion) and petrochemicals ($87 billion).Deutsche Bank, Dubai Islamic Bank and Lehman Brothers, the anticipationof weak international demand did not lead to a cancellation of thedeal. Instead, it led to its denomination in dirham rather than dollars,with the transaction eventually offered as a very successful Dh7.5billion ($2 billion equivalent) floating-rate note (FRN), which made theJAFZ deal the largest ever non-convertible sukuk, with local investorsaccounting for 62% of distribution.Much of the focus for investment will inevitably be concentrated onthe Middle East, but the populous and fast-growing Indian economyalso has a massive infrastructure requirement. The government hasrecently put the size of that requirement at $500 billion between 2007and 2012, meaning that some 9% of GDP will need to be invested ininfrastructure over the next five years.Table 3: Key project financing transactions in 2007Project Country Sector AMOUNT (US$ mn) Type of FinancingIndian Economic Zone India Infrastructure 10,000 Islamic Financing FacilityEnergy City China China Power 5,000 Istisna’aTunisian Financial Harbour Tunisia Real Estate - Commercial 3,000 Islamic Financing FacilityDeyaar Park UAE Real Estate 3,000 Istisna’aSaudi Telecoms Saudi Arabia Telecommunications 2,500 Murabaha FacilityAl Raha Beach Project UAE Real Estate 2,100 IjarahLeisure & real estate projects UAE Real Estate 1,850 IjarahRoyal Metropolis Jordon Gate Jordan Real Estate - Residential 1,000 Islamic Financing FacilityDurrat Al Bahrain Bahrain Real Estate - Residential 1,000 Islamic FundBarwa Real Estate expansions Qatar Real Estate 800 Murabaha FacilityDubai Business Park UAE Real Estate - Commercial 700 Islamic Financing FacilityLow Sulphur Diesel Production Facility Bahrain Oil & Gas 685 IjarahQueen Alia Intl Airport Expansion Jordan Infrastructure - Airports 680 Islamic Financing FacilityEthylene-Glycol Plant Saudi Arabia Petrochemical 650 Istisna’aMarafiq IWPP Saudi Arabia Water & Power Plants 600 Islamic Financing FacilitySource: IFIS, 19 December 2007Islamic capital markets still breaking records11
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