IFFIm, a sister company of the World Bank, achieved a $700m order book for its $500m deal, priced at the end of November. This was much smaller than some of the big subscription multiples seen this year in the undersupplied sukuk market, and sources close to the deal offered different justifications.
These ranged from the sukuk’s very tight pricing – just 15bp over mid-swaps – to its murabaha structure, its ineligibility in UK Islamic banks’ liquid asset buffers and IFFIm’s ‘otherness’ for Gulf investors, being a European non-Islamic borrower.
But $500m was at the top end of IFFIm’s target range and represents the borrower’s total funding needs for more than 12 months. For IFFIm – the newest and smallest supranational in the world – to issue the largest ever supranational sukuk debut, is a worthy accomplishment.
And while the long-established Islamic Development Bank’s sukuk offers a better return and certainly is more familiar, one only has to go back two years to see an even skinnier ratio in its order book. IsDB, which has numerous central banks as its members, issued $800m in June 2012 with just $900m of orders.
Nor can IFFIm be compared to this year’s other non-Islamic debutants the UK and Hong Kong. Those had obvious worldwide name recognition before even starting the process, whereas IFFIm was largely unfamiliar to Islamic investors. That was addressed during non-deal roadshows in September and the deal roadshow just before launch, which visited Saudi Arabia, the UAE, Qatar, Malaysia, Brunei, Jordan and the UK.
Inclusion in liquid asset buffers is one aspect that should be addressed before IFFIm comes to the sukuk market again (as it says it wants to). That would make the paper more attractive to deposit-taking UK Islamic banks.
But that the Bank of England hasn’t ascribed the sukuk such a status already says more about the shortfall of the regulator’s parameters rather than IFFIm’s lack of trying on this front.
The Bank looks at volume outstanding as well as credit quality in setting its liquidity rules, but ruling out IFFIm on this measure belies the fact that IsDB sukuk – for many years the only highly-rated paper available to UK Islamic banks for their liquidity buffers – has always been very illiquid because it is held onto tightly by anyone who gets a piece.
Familiarity is the only other area that might be improved upon next time. As a charity, IFFIm is never going to pay more than it has to for a sukuk, so a generous premium can be ruled out.
IFFIm’s sukuk is a big success – for bringing an ethical borrower of such stature into the nascent Islamic finance market and for the high quality – if targeted – order book it achieved.
But perhaps most importantly, the borrower is happy enough with the result to want to repeat the deal. Of all the landmark sukuk debuts this year, that’s probably the best possible affirmation of the deal.