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Emerging Markets

GE opens Islamic finance market for US corporates

The world's largest corporate issuer smashes open sukuk market with trail-blazing debut

General Electric Capital Corp (GECC) became the first US corporate to launch an Islamic bond after pricing a $500m benchmark on Thursday. The deal gives a boost to sukuk markets at a time when issuers around the world are stepping up their search for diverse funding sources. GECC (AA/A2) priced the five year benchmark with a three year 3.87% fixed rate coupon at a spread of 175bp over US Treasuries. On November 10, GECC sold $1.5bn of five year notes to yield 3.838%, or a spread of 155bp. As a result, the US corporate issuer paid an effective new issue premium of around 20bp, said a banker on the deal.

Deputy treasurer at GECC, Kitty Yoh said: "We have a huge commercial interest in the Middle East and this deal is a reflection of our strengthening business ties in the region while providing a platform to diversify our funding."

The deal follows a roadshow in the Gulf and Asia with joint bookrunners Goldman Sachs, Citigroup, Kuwait’s Liquidity House (a subsidiary of Islamic bank Kuwait Finance House) and National Bank of Abu Dhabi.

Dedicated Islamic investors in the Gulf bought the bulk of the deal with a modest distribution in Asia, said Yoh. Rumours were rife that bankers on the Reg S deal released price whispers of 165bp-175bp and attracted $1bn of demand in total. The issuer and bookrunners declined to comment. "Islamic transactions do not have the same amount of liquidity as conventional US dollar deals so this 20bp so-called concession is a reflection of that," said Yoh. Buoyed by the still competitive pricing of the debut sukuk, Yoh revealed the GECC will seek to issue another benchmark Islamic bond next year pending market conditions.

General Electric is the world’s largest corporate issuer via GE Capital Finance. The borrower has dived into markets this year to pre-finance upcoming debt maturities. In the coming years, the borrower will seek to halve its annual global bond programme from the average $40bn in years preceding the crisis, said Yoh.

GECC will issue $20bn of global bonds in 2010 and any further sukuk issues will be counted as separate capital raising ventures. "We want to maintain different funding platforms — such as sukuk bonds — even as we downsize GE’s balance sheet because we think diversification is a wise move," said Yoh. In a sign of General Electric’s deepening commercial ties in the region, it signed in July an $8bn commercial finance joint venture with Mubadala, a state-owned investment company based in Abu Dhabi.

However in a blow to Islamic bankers, Yoh poured cold water on suggestions that the borrower will pay up and build a yield curve with annual sukuk benchmarks. "Whether you see us come to market with sukuks every year is an open question because this will depend on investor preferences."

An Islamic finance banker close to the issuer said: "This will always be a niche market for large US corporate borrowers and so the pace of further deals will be constrained by pricing and secondary market liquidity."

Blazing a trial

Islamic issuance fell by 56% to $14.9bn in 2008 as credit markets froze up, but, in recent months Gulf sovereign and state-backed corporates have bombarded the market with competitively priced Islamic transactions. However, Malaysian oil company Petronas, which issued a $1.5bn five year sukuk in August, and GECC remain the only two non-Gulf debut sukuk issuers of the year.

As is typical of such deals, the bulk of GECC’s $500m sukuk was snapped up by traditional buy-and-hold Islamic accounts. This might mean that the deal, like its predecessors, will be blighted by poor secondary market liquidity. Nevertheless, the $500m paper will serve as a useful benchmark for other budding US borrowers with a business presence in the region, said the head of Islamic finance for a US bank in Dubai.

"This deal will be an interesting case study but if you are an entity that has no linkages to the Middle East or Asia, sukuks may not be the right diversification play because Islamic investors feel more comfortable with businesses they are familiar with."

GECC’s deal may have also helped to kick open the sukuk market further by broadening the traditional list of assets eligible to finance an Islamic issue. The sukuk is an Ijarah structure and will be backed by operating lease receivables of GE’s aviation leasing business.

Ijarah structures are typically backed by land parcels. GE owns around 1,500 aircraft, leased to global airlines, with average lease terms of seven years. Islamic bonds are typically in five year format as this is the sweet spot for local investors. Yoh said the borrower has already identified a large pool of assets suitable for backing up a further benchmark sukuk issue in 2010.

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