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 sukuk 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 sukuk market – given that Goldman built the hardest circumstances for itself in which to do the deal.
First, Goldman decided it would sell almost all of the sukuk into the Middle East, rather than taking the easier route of marketing to Asia, Europe and the US. While Middle Eastern accounts have been big buyers of paper from their own region — more than 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 almost confined itself to that one region, Goldman opted for a sukuk structure far from most Middle Eastern buyers' comfort zone. 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 they think Islamic finance is supposed to be about.
Sukuk that have more than 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 weren't 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 the deal did among a run of other bank and sovereign issues (which are, of course, 0% risk-weighted from a capital perspective) it was unlikely to be a priority investment.
Yet for all that, Goldman crossed the line. Not everyone who ended up holding the sukuk might have wanted as much as they got, if allocation rumours are to be believed, but that's a risk of over-inflating orders, a 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 result as a reason to shelve their own sukuk plans. The investment bank has posed tough but illuminating questions for Middle Eastern investors about their principles and process. Goldman's travails will, at worst, have confirmed to western borrowers what they should already have realised – that issuing a sukuk is better regarded as a relationship play 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 in the Islamic market – whether the purists like it or not.