Examples of Sukuk issuances and their structures
Standard and Poor’s estimates that 20 per cent of those investors, with billions to invest, would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile.
That has led to the increased use of the Sukuk, especially in the Gulf countries and Malaysia. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), defines Sukuks as “certificates of equal value representing after closing subscription, receipt of the value of the certificates and putting it to use as planned, common title to shares and rights in tangible assets, usufructs and services, or equity of a given project or equity of a special investment activity.”
Introduced in varied structures and sizes, Sukuks worth $20 billion hit the market in 2006 and are expected to surpass $50 billion in 2007 as the companies seek to diversify their sources of financing. Although companies in Kuwait, Bahrain, Saudi Arabia and Qatar have all been actively using Sukuk financings over the years, Malaysia led the Sukuk issue market in 2006 with a share of about 60 per cent. That year also witnessed the first Sukuk that originated in the United States. The trends in 2007 clearly suggest that the United Arab Emirates, especially Dubai, have most likely taken over the lead.
Sukuk structures are being used for a variety of purposes and have evolved rapidly in response to the demands of issuers and investors. Sukuk issues have ranged from the simple sale and leaseback (Ijara) structures, such as the $1 billion Dubai Department of Civil Aviation Sukuk issued in November 2004, to the $2.53 billion trust finance Sukuk structure issued by Aldar Properties in March 2007, demonstrating the flexibility of Islamic finance principles.
Below are examples of some recent Sukuk issues that show and emphasise that Sukuk has matured into a diversified, internationally-acceptable instrument to raise corporate finance for acquisitions or working capital purposes, or to re-finance existing debt, or use in the transportation sector (especially in the shipping and aircraft sectors), real estate, construction and petrochemical projects in several countries.
German Sukuk (Saxony-Anhalt Sukuk)
In 2004, a €100 million Sukuk, structured as a Sukuk Al Ijara, was issued in the federal state of Saxony-Anhalt in Germany. The Federal Republic of Germany guarantees the debts of Saxony-Anhalt. The underlying transactions are a certain number of specified buildings owned by the Ministry of Finance. The master lease was sold for 100 years to a special purpose vehicle, incorporated in the Netherlands for tax reasons, which in turn rented it back for five years to the Ministry of Finance. The certificate holders receive a variable rent benchmarked to the EURIBOR over the rented period. The Sukuk is listed on the Luxembourg Stock Exchange. Incidentally, as of July 2007, the Saxony-Anhalt Sukuk remains the only sovereign Sukuk from a non-Islamic country to have tapped the market.
Sukuks by the Governments of Bahrain, Qatar and Malaysia
The Central Bank of Bahrain, on behalf of the Government of Bahrain, regularly issues Sukuk-Al-Ijara and Sukuk Al-Salam to finance various infrastructure projects in Bahrain. Malaysia’s Global Sukuk, launched in June 2002, was similarly backed by an Ijara lease on a single piece of government property. The money raised by the Government of Qatar through the $700 million Qatar Global Sukuk is being used partly to finance the construction of the Hamad Medical City.
First Airlines Sukuk – Emirates Airlines Sukuk
The first Sukuk issued by Dubai’s national airlines, Emirates, closed in July 2005. At $550 million, this was the single largest corporate Sukuk issuance at that time. The Sukuk has a seven-year tenor and is structured as a Musharaka. The proceeds of the issue, which is listed on the Luxembourg Stock Exchange, will be used to finance the new Emirates Engineering Centre and their headquarters building in Dubai.
First Ship Finance Sukuk – MT Venus Glory Sukuk/Al Safeena Sukuk
In 2005, ABC International Bank jointly with Abu Dhabi Commercial Bank arranged, structured and jointly underwrote a pioneering Islamic ship finance transaction through the issuance of a $26 million Al-Safeena Ijara Sukuk. At that time, Al-Safeena Sukuk was the first issue that combined Islamic equity with conventional debt for the same asset, which in this case was VLCC (called “Venus Glory”), owned by Pacific Star (Pac Star) International Holding Corporation, which in turn is owned by Saudi Aramco, the world’s largest oil exporting company.
Dubai Civil Aviation Authority Sukuk
The Dubai Civil Aviation Authority, a quasi-sovereign entity, broke the mould in 2004 by going down the Sukuk route instead of plain vanilla finance, by issuing a $1 billion Sukuk, the world’s largest single Sukuk issuance in terms of size at that time by any issuer. The proceeds were used to finance the building of a new international terminal and for the expansion of existing engineering and other infrastructure. The Musharaka was set up to develop a new engineering centre and a new headquarters building on land situated near Dubai’s airport that will ultimately be leased to Emirates. Profit, in the form of lease returns, generated from the Musharaka will be used to pay the periodic distribution on the trust certificates.
Bahrain Financial Harbour – Al Marfa’a Al Mali Sukuk
The Istisna’a-Ijara Sukuk, known as the Al Marfa’a Al Mali Sukuk, has been structured by the Liquidity Management Centre in accordance and in compliance with the principles of Islamic Shari’a. The Sukuk has a five-year term maturing in 2010 offering a quarterly profit distribution with the proceeds used to finance the development and construction of the Financial Centre which represents the first phase of the Bahrain Financial Harbour project comprising the Dual Towers, the Financial Mall and the Harbour House.
Dubai World Sukuk
In 2006, Dubai property developer Nakheel Group, developer of three palm-frond shaped islands off Dubai’s coast, sold the world’s largest Islamic bond after increasing its size by more than 40 per cent to $3.52 billion to meet demand. Nakheel will use cash from its Sukuk to fund projects in Dubai, which is leading a surge in Gulf Arab investment in construction and real-estate developments. The Sukuk has been listed on the Dubai International Financial Exchange.
DP World Sukuk
In 2007, global marine terminal operator DP World priced a $1.75 billion conventional bond and a $1.5 billion Sukuk. It is the first issuer to list both conventional and Islamic debt securities on the Dubai International Financial Exchange.
The $1.5 billion, 10-year Sukuk attracted demand globally, including from the United States. This was the first time U.S. investors had the opportunity to subscribe to a UAE corporate rated Sukuk. DP World’s Sukuk is ground breaking and innovative because it is partly convertible to shares in the event the ports group lists through an initial public offering, thus becoming the first convertible instrument in the Islamic finance market. The issue is part of a large financing package being arranged for general corporate activities, ongoing business development needs, and expansion plans, including the financing of the purchase of the British rival P&O.
East Cameron Gas Sukuk
The first and only Sukuk to have originated from the United States tapped the market in 2006. The unique feature of the East Cameron Gas Sukuk was that it was the first ever Shariah compliant gas backed securitisation and was the first-ever Islamic securitisation rated by Standard and Poor’s. The $165.7 million Sukuk originated from Houston based East Cameron Partners, whose reserves are located in the shallow waters off the shores of the State of Louisana. The Sukuk was structured as a Musharaka structure in terms of the management of the assets and then a funding agreement between the issuer and the purchaser.
The initiatives taken by the governments of the UAE, Bahrain, Malaysia and the United Kingdom, to name a few, have acted as a catalyst for the evolution and growth of the Sukuk market and the development of Islamic Finance as a whole. The regulatory bodies within such countries have been actively introducing rules and regulations pertaining to the issuing and offering of Sukuks, which we hope in time will help provide standardisation, resulting in the maturation of the field.
From the financing structures focused mainly on plain vanilla type commodity-trading murabaha transactions to the complex structures involved in the Sukuks, Islamic finance has come a long way and Sukuks have emerged as high profile financial instruments. With top international banks, financial institutions, law firms and other financial services providers scampering for a piece of the cake in the Middle East, Islamic banking and finance has grown into a full-fledged practice area of its own. With a catalogue of successful issues worth billions of dollars reflecting the huge appetite for Sukuks, there are all signs pointing towards the long term success and growth of Sukuks.