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Innovating for the Future: The Next Generation of Post Credit Crunch Sukuk Structures

Preparing for the Next Wave of ICM Offerings

Judging from the activity in the global Islamic Capital Market (ICM) in general and the Sukuk market in particular over the last few months, there are definitive signs that the market is back on track and can only move upwards as both issuers and investors seek value-added yet safer ways of raising and placing funds respectively.

Indeed, Standard & Poor's (S&P), the international rating agency in a report published earlier this year concurs that the long-term prospects for the global Sukuk market are good, despite a decline in volume in 2008. This decline was primarily due to the impact of the global financial turmoil which led to a liquidity squeeze, widening of credit spreads and investors' wait-and-see attitude.

S&P expects the market to start picking up in the second half of 2009 through to 2010. The drivers for the long-term Sukuk market it contends are strong. These include the increasing popularity of Islamic financial products on the Middle East and Muslim Asia; greater government support for Islamic finance; the huge project and investment spend especially in the GCC; and the desire of issuers to tap investors in the Middle East and Asia.

The impact on Sukuk has largely shadowed that for conventional bonds - widening of spreads; decline in the average issuance size; and a move away from US dollar-denominated issuances to local currency offerings.

However there are some surprisingly enterprising trends emerging in the ICM sector which augurs well for the future. There is a revival of the sovereign issuance market albeit in domestic retail offerings by debut issuers such as the Indonesian Ministry of Finance; and local currency reverse enquiry Sukuk programmes such as the one launched by the Monetary Authority of Singapore (MAS). At the same time, there is a widening of the origination demography, away from the monopoly markets of the GCC and Malaysia. Corporate issuances have recently originated out of Jersey and Kazakhstan but structured by UK and Swiss-based investment banks. Bankers in London are also reporting two possible corporate Sukuk issuances out of the UK during 2009, one possibly to the tune of GBP1 billion.

Gatehouse Bank plc, the latest Islamic investment bank to be authorized by the UKs Financial Services Authority (FSA), earlier this year arranged a US$1bn Sukuk programme for Milestone Capital PCC, a Jersey-based orphan protected Cell Company. The first Sukuk issue under the Milestone platform was successfully completed almost immediately. According to David Testa, CEO of Gatehouse, given the strength of interest in the Milestone platform, we are considering increasing the Programme limit significantly, and look forward to using it to produce tailored products for our clients.

To further stress the attractiveness of investing in Sukuk and especially giving access to secondary trading and capitalizing on the current yields, the market is also witnessing the emergence of several Sukuk funds such as the one launched by Emirates NBD and the one contemplated by BNP Paribas.

While there is a natural retrenchment to the basics with the vanilla Sukuk Al-Ijarah still the preferred structure, both structurers and Shariah advisories are taking up the challenge of innovating for the future. The Singapore dollar-denominated Sukuk issuance facility to provide Shariah-compliant regulatory assets for local and regional Islamic and other interested banks is one such facility. The facility is being issued on a reverse enquiry basis - based on the demand of financial institutions operating in Singapore.

The Sukuk Al-Ijarah facility, which was jointly arranged by Standard Chartered Bank and the Islamic Bank of Asia (IBA), as such is the Shariah-compliant equivalent of Singapore Government Securities (SGS), and is of the highest credit standing. The facility, stressed MAS, will be given equal regulatory treatment as SGS, such as qualifying as an asset in the computation of capital and liquidity requirements, and as eligible collateral for tapping MAS liquidity.

In the UK, despite the delay in the timing of the proposed debut UK sovereign Sukuk in the wholesale sterling market, HM Treasury has actually pushed ahead with the remaining enabling legislation which is published in the Finance Act 2009. This puts the UK government on a ready footing should it decide to go to the market later in 2009 or in early 2010.

With these encouraging developments, ICG Events are organizing the 2009 London Sukuk Summit, the third successive summit in the series, along the theme Innovating for the Future: The Next Generation of Post Credit Crunch Sukuk Structures/Preparing for the Next Wave of ICM Offerings.

As such, the timing of the Summit could not be more opportune and follows on from the highly successful inaugural London Sukuk Summit along the theme Strategies for Today; Demystifying Islamic Capital Market Products held in June 2007; the equally successful follow-up London Sukuk Summit in June 2008 along the theme Gearing up for UK Sukuk Originations, and the inaugural and well-attended Asia Sukuk Summit 2009 along the theme Towards a New Silk Route for Islamic Finance held in February 2009 in Hong Kong.

These are indeed exciting times for the Islamic finance sector which has better withstood the vagaries of the credit crunch and the global financial market. The challenge is to consolidate these Islamic Capital Markets and Sukuk structures and to come up with even more imaginative structures and products.

The market developments whether they be in Dubai, London, Hong Kong, Singapore, Bahrain, Jeddah, Hong Kong or Kuala Lumpur are underpinned by progress in enabling regulation, legislation, innovation, Shariah governance, diversification and market education.

The 2009 London Sukuk Summit is specifically aimed at harnessing these developments to keep you informed about the Sukuk market developments and innovation; to provide a platform for dialogue with your peers; and to give you a voice in contributing to the future direction of the Islamic debt and capital markets. Can you afford to not to be part of this informative, inspiring and imaginative process!


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