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Triumphant UK debut takes sukuk to the mainstream

Robert Stheeman
By Dan Alderson
26 Jun 2014

This week’s first-ever Western sovereign sukuk represents a landmark moment in the global expansion of Islamic capital markets that offers significant potential to attract further new names to the product, writes Dan Alderson.

The United Kingdom’s heavily oversubscribed £200m five year also bolsters its credentials as a key international centre for Shariah-compliant financing.

“We think this sale sends the clear message that the UK is committed to becoming the Western hub of Islamic finance,” said Robert Stheeman, chief executive officer of the UK’s Debt Management Office. “We hope that this pioneering move by the government will encourage new private-sector issuers to follow in our wake and continue to grow the market.”

Tiny in comparison with the £5bn of regular Gilts the UK Treasury brought this week, the sukuk repaid the substantial work it required before launch by drawing a £2.3bn book in short order. The DMO priced the deal flat to its 1.75% July 2019 Gilt on Wednesday to give a 2.036% profit rate.

Barwa Bank, CIMB, HSBC, National Bank of Abu Dhabi and Standard Chartered were the lead managers and bookrunners. Of those, Barwa is the only purely Islamic bank, although CIMB and Standard Chartered have Islamic units.

“This will undoubtedly act as a catalyst for future sukuk issuance from the UK and the West for sovereigns and corporates,” said Spencer Maclean, Standard Chartered's head of syndication for the West.

While the UK has no plans to issue further sukuk, according to Stheeman, the buzz around the debut already appears to have galvanised other governments. Luxembourg, the UK’s rival in the race for the debut deal, is now looking to pass its sukuk bill in early July.

After a pause of several months, the government’s finance committee nominated a new figurehead for the €200m project. It presented a revised bill to the Council of State, which had rejected the first draft in March.

Meanwhile, the lower house of Morocco’s parliament suddenly passed its Islamic banking law on Wednesday, paving the way for Islamic bank launches and private company sukuk. This preliminary approval — which will move to its upper chamber — came only a week after a senior official suggested to GlobalCapital’s Islamic Finance Information Service that the bill would probably not be ready until October.

Potential issuers

“We hope other governments, such as Luxembourg, will find this encouraging,” said Harris Irfan, managing director at London-based European Islamic Investment Bank. “Luxembourg will face other challenges, such as a different currency and lower yield. But they can learn a lot from what the UK has done and where they can build on that. Hopefully they will see the benefit of setting up a programme, so that they can take advantage of ongoing infrastructure financing and other areas.”

“We hope that the successful UK sukuk and the very high demand seen from investors will encourage the government to issue another sukuk,” said Humphrey Percy, chief executive officer of Bank of London and the Middle East, the UK’s largest Islamic bank. “However, there is a possibility that the impact of this UK sukuk could have wider implications and encourage UK corporates to consider sukuk when looking to raise funds.”

The deal should yield wider benefits for the UK, argued Steve Troop, advisor to the chairman and ex-CEO of Barwa Bank, one of the lead arrangers. “What the Treasury is thinking is that this is an educative process around acceptance,” he said at Euromoney’s Global Borrowers forum this week.

“The idea is to produce potential issuers around the UK who might not have thought about sukuk as an alternative form of funding. The subtext there is that the UK has significant infrastructural regeneration procedures over the next 20 years. Those are long-term assets that scream sukuk opportunity.”

Irfan echoed the point. “We want to be at the forefront of initiatives that follow on from the sukuk, such as working with government on infrastructure financing, project bonds and local authority borrowing,” he said.

UK Islamic banks were among the main intended beneficiaries of the deal. To comply with Bank of England regulations they need highly-rated Shariah-compliant paper — and preferably in sterling — to put in their liquid asset buffers. Until now, dollar issues from the Islamic Development Bank have been the only suitable sukuk available.

No premium

Earlier on Wednesday morning in London, leads gave initial guidance on the five year note of flat to 2bp wide of the Gilt, but in the end did not need the any new issue premium. “Pricing flat to the Gilt is reflective of the quality and quantity of demand and represents fair value for both the issuer and the investor,” said Maclean.

There was an even split in geographical allocation, with 39% going into the UK, 37% to Middle East buyers and 24% to Asia. Banks made up the biggest investor type with 59%, while central banks and official institutions took 25% and fund managers 16%.

“The Treasury wanted to ensure a diversified spread of investors and this was successfully achieved,” said Stheeman. “Geographically there was a broad distribution of sales across the UK, Middle East and Asia with sales to private banks, central banks and official institutions and fund managers. We received strong support from investors on the roadshow for the UK government’s commitment to Islamic finance.”

“The strong order book reflected the strength of demand for this product and the broad geographic demand demonstrated the widespread support for the UK’s objectives and need for issuance of such high quality,” added Maclean. “There was some demand from traditional Gilt buyers, although the allocation was focused to the demand from both the British and global Islamic investor base.”

Law firms Linklaters and Clifford Chance advised on the deal.

“This innovative transaction represents a really exciting development for the Islamic financial services industry,” said Neil Miller, global head of Islamic finance at Linklaters. “The UK is one of the world’s major economies and this sukuk, delivering on past expectations, is a significant statement of support by the government for the United Kingdom as the most important centre for Islamic finance outside the Muslim world.”

“We are very proud to be involved in such a landscape-changing deal,” added Qudeer Latif, global head of Islamic finance at Clifford Chance. “A sovereign issuance of this kind lays the ground work for future Islamic financings in the UK, opening the Islamic financial markets to companies, financial institutions and other governmental entities who seek new sources of funding.”

By Dan Alderson
26 Jun 2014