Conventional borrowers needing persuasion to issue in the Islamic finance market have been watching Goldman closely. The investment bank is palpably non-Islamic, and has no natural need to raise sukuk. It is not short of wholesale debt, it is not trying to build an Islamic financial centre, it has ready access to other funding sources and name recognition verging on notoriety across the world. So it has been a test case for what the market can offer to conventional issuers.
Goldman's deal widened sharply in secondary markets, but other conventional issuers should still take the result as a vote of confidence in the market – in large part because Goldman gave itself the hardest possible set of circumstances in which to get the deal done.
Firstly, Goldman decided that it would sell almost all of the sukuk into the Middle East, rather than giving itself an easier ride by marketing to Asia, Europe and the United States. While Middle East accounts have been big buyers of paper from their own region – over 60% for some financial sukuk – they have seldom filled the whole book. Some purer-than-pure Islamic deals would have struggled with such a marketing strategy.
Then, having put all of its emphasis on that one region, Goldman opted for a sukuk structure that is far from the comfort zone of most Middle Eastern buyers. Many practitioners from the region despise commodity-backed murabaha structures, which they see as a quick fix replication of conventional loans and a long way from the real economy, asset-backed, revenue-generating business that they think Islamic finance is supposed to be about.
Sukuk that have over 50% murabaha contracts as underlying cannot be traded in the secondary market, except at par, making them entirely illiquid. Goldman’s sukuk is 49% murabaha, with the rest backed by a wakala agency investment. But even then clause 11 of its prospectus reveals that the wakala component is to be invested in a portfolio of commodities.
As if these points were not already a large enough hurdle for the deal, there was another problem: Goldman itself. By its nature, the bank is unlikely to become a doyen of the Islamic market. And even if its reception there has improved, then coming as it did among a run of other bank and sovereign issues (which, let’s not forget are 0% risk-weighted from a capital perspective) it was unlikely to be a priority investment.
Yet for all that, Goldman crossed the line. Perhaps not everyone who ended up holding the sukuk necessarily wanted as much as they got, if allocation rumours are to be believed, but that's a risk of over-inflating orders, an ordinary challenge in any syndication.
And the 30bp widening in secondary markets sounds bad, but the drop in price terms was less than two points. At its reduced levels, conventional buyers belatedly woke up to an arbitrage opportunity with Goldman’s January 2019 note and a bid returned (which underlined that if such investors had been involved in the first place the deal might have fared better).
But other conventional borrowers should not take this as a reason to shelve their own sukuk plans. The investment bank has asked Middle East investors tough but illuminating questions about their principles and process. Goldman's travails, at worst, will have confirmed to western borrowers what they should already have realised – that issuing a sukuk is better regarded as a relationship play rather than a sure-fire funding tool.
Goldman’s persistence is remarkable to behold. Having crashed and burned with its first approach to sukuk investors in 2012, the bank has left an impression in 2014 and next time will be back with even more confidence.
Goldman is now a fixture of the Islamic market – whether the purists like it or not.