Bahrain's attempts to become the leading Islamic finance centre got a big boost through the central bank's first international sukuk bond deal in June.
The Bahrain Monetary Agency's (BMA) $250 million, five-year floating note proved a big hit with Islamic and conventional investors alike. The transaction is not a new borrowing but a refinancing of an existing BD100 million ($265 million), 30-year conventional bond, which was launched in February 1999.
The bond also helped Bahrain diversify its investor base. Before this transaction, the Kingdom had issued sukuk or Islamic leasing bond deals only locally or regionally. But this issue was snapped up by non-Middle East investors as well as local and regional funds.
In all, 20 accounts participated, with European and offshore US investors taking just over 20% of the order book. About 70% of the paper was placed with conventional funds. Central banks bought 10% to 12% of the paper, asset managers about 20% to 25%, while the remainder went to banks.
The bond was priced at six-months Libor + 45bp. That compares with an offer price of six-months Libor + 60bp for a regional sukuk bond for the same amount and with the same tenor issued by the BMA in May 2003.
Originally, the international sukuk was due to be launched at the end of last year. But a change in its structure meant that it was put on hold. Lead manager Citigroup and the BMA decided to change the structure from the typical sale-and-leaseback transaction to a head-and-sub-lease structure.
“The head lease gives fully enforceable and comprehensive rights over the assets to the SPV, which are transferred to investors on a pro rata basis through the declaration of trust, and then the sub lease yields the five-year coupon and principal repayment,” says Usman Ahmed, vice-president in Citigroup's global Islamic finance team.
This is the first sovereign issue to be structured this way, he adds. “The structure is innovative, not that complicated and cost efficient from the issuer's point of view,” he says. “It should provide a blueprint for future issuers, particularly in jurisdictions where a sale of assets attracts significant taxes or registration fees.”
The BMA made presentations to investors in the Middle East and Kuala Lumpur, another thriving Islamic finance centre.
The deal is the central bank's ninth sukuk. The bond was issued through a special purpose vehicle, the BMA International Sukuk Company. Gulf International Bank, National Bank of Bahrain and Arab Bank acted as co-lead managers.
The BMA issued the bond on behalf of the ministry of finance and economy. It was the fourth international sukuk bond out of the Middle East, the others being issued by Malaysia, Islamic Development Bank and Qatar.
Issuer: BMA International Sukuk Company
Date of launch: June 23, 2004
Amount: $250 million
Maturity: Five years
Coupon: Libor + 45bp
Credit ratings: A- (S&P)
Lead manager: Citigroup