Cross-Border Sukuk Issues


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Cross-Border Sukuk Issues

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Cross-Border Sukuk Issues

  1. 1. Cross-Border Sukuk Issues David Testa, Executive Director Head of Islamic Finance, WestLB London Sukuk Summit Royal Horseguards Hotel, 21 June 2007
  2. 2. WestLB and Islamic Finance Expansion & Innovation Two Case Studies Stimulants for Continued Growth
  3. 3. <ul><ul><li>WestLB has arranged and underwritten: </li></ul></ul><ul><ul><ul><li>over 15 Islamic financings since the beginning of 2005 </li></ul></ul></ul><ul><ul><ul><li>principal aggregate amount of over US$6.0bn </li></ul></ul></ul>WestLB – Islamic Finance Highlights *Source: Dealogic Loanware, no. of facilities USD 210,000,000 Sukuk Joint Mandated Arranger & Joint Bookrunner October 2005 USD 850,000,000 Islamic Finance Joint Mandated Arranger March 2006 USD 500,000,000 Commodity Murabaha Joint Mandated Arranger April 2006 USD 100,000,000 Musharaka Trust Sukuk Joint Mandated Arranger September 2006 USD 150,000,000 Musharaka Trust Sukuk Sole Underwriter & Bookrunner September 2006 USD 1,000,000,000 Ijara Syndicate Joint Mandated Arranger January 2006 USD 300,000,000 Syndicated Standby Morabaha Joint Mandated Arranger & Joint Bookrunner December 2006 USD 31,000,000 True Murabaha Sole Mandated Arranger & Sole Bookrunner December 2006 USD 600,000,000 Dar Al-Arkan Joint Lead Manager & Joint Bookrunner March 2007 USD 1.1bn Commodity Murabaha Facility Joint Mandated Arranger & Joint Bookrunner April 2007 £225m Commodity Murabaha Facility Sole Mandated Arranger & Bookrunner May 2007
  4. 4. Expansion and Innovation <ul><li>Important Market: New but fast growing niche in the global capital markets: </li></ul><ul><ul><li>Growing at approximately 10-15% per annum </li></ul></ul><ul><ul><li>S&P estimate the market to be approximately US$400bn, with a potential of US$4 trillion (report Oct 2006) </li></ul></ul><ul><li>Islamic finance markets: strong growth over the last 2-3 years: </li></ul><ul><ul><li>total volumes just over US$8bn in 2004 </li></ul></ul><ul><ul><li>over US$28bn in 2006 </li></ul></ul><ul><ul><li>over half the volume in 2004 originated from Malaysia, but the balance has shifted, with financings in the GCC accounting for some US$15bn of the 2006 total </li></ul></ul><ul><li>BUT – still a “niche within a niche”: </li></ul><ul><ul><li>Over US$2 trillion of conventional bonds and short-term note issuance in 2006 </li></ul></ul><ul><ul><li>Total GCC syndicated loan volumes for 2006 reached over US$65bn </li></ul></ul>
  5. 5. Expansion & Innovation <ul><li>A new product - the first GCC sovereign Sukuk issued in 2001 </li></ul><ul><li>Rapid growth </li></ul><ul><ul><li>2005 volume of issuance: 55 issues in 2005 raising US$9.6bn* </li></ul></ul><ul><ul><li>2006 volume of issuance: 66 issues raising US$17.0bn* </li></ul></ul><ul><ul><li>2007: 40 issues totalling US$33.8bn announced* </li></ul></ul><ul><li>Volumes in GCC increasing: </li></ul><ul><ul><li>2005: 11 issues raising US$2.3bn* </li></ul></ul><ul><ul><li>2006: 17 issues raising US$6.4bn* </li></ul></ul><ul><ul><li>2007: US$50bn commonly forecast* </li></ul></ul>* Source: IFIS
  6. 6. Expansion & Innovation GCC Total: US$5,846.9m (15 issues representing 49.9% of total issuance) Source: IFIS (Islamic Finance Information Service) 51 11,721.55 Sum Total of all Countries 7 101.00 Bahrain 1 16.48 Pakistan 1 200.00 Kuwait 35 5,858.17 Malaysia 1 600.00 Saudi Arabia 6 4,945.90 United Arab Emirates No. of Issues Total issued in USD$ (Million) Country Sukuk Statistics Q2 2007; by Country Up to 10th June 2007
  7. 7. Expansion & Innovation <ul><li>Convertible issues </li></ul><ul><ul><li>Dubai Ports Authority: US$3.5bn Musharaka Sukuk </li></ul></ul><ul><ul><li>Nakheel: US$3.52bn Pre-IPO Sukuk (including look-back rights) </li></ul></ul><ul><li>Exchangeable issues </li></ul><ul><ul><li>Aabar Petroleum US$460m Sukuk issue  Mudarabah structure </li></ul></ul><ul><ul><li>Aldar Properties US$2.53bn Sukuk issue  Mudarabah structure </li></ul></ul><ul><li>Put and Call Options </li></ul><ul><ul><li>SABIC US$8000m 20 year Sukuk issue with 5 year put </li></ul></ul><ul><ul><li>The Investment Dar US$150m Musharaka Sukuk due 2011 </li></ul></ul><ul><ul><ul><li>Put and call options at the end of year 3 </li></ul></ul></ul><ul><li>Co-ownership structure </li></ul><ul><ul><li>Sharjah Islamic Bank US$225m Sukuk Certificates due 2011 </li></ul></ul><ul><ul><ul><li>Co-ownership structure utilising assets in SIB’s Islamic portfolio </li></ul></ul></ul><ul><li>MTN Programmes </li></ul><ul><ul><li>Sa’ad Group US$5bn programme </li></ul></ul><ul><ul><li>Others soon to follow… </li></ul></ul><ul><li>Securitisation </li></ul><ul><ul><li>First significant issues awaited… </li></ul></ul>
  8. 8. Expansion & Innovation: Wide Appeal of Sukuk Issues <ul><li>Sukuk issues consistently appeal to both Islamic and conventional investors: </li></ul>Source: DEALOGIC Bondware “ the first rated Sukuk by a bank” “ 25 accounts participated…with Middle Eastern investors taking 58% of the paper, Europeans 34% and Asian investors 8% ” “ Banks bought 84% of the deal and funds 16%” 65bp Sharjah Islamic Bank US$225m (October 2006) “ more than 90% of the accounts … were conventional buyers ” “ Asia 35%, Europe 26%, the Middle East 32%” “ Banks took 43%, central banks 23%, corporates 12%, agencies 10%, insurance 2%” 14.3bp IDB Trust Services, US$ 500mn (June 2005) “ 27% distribution outside of the Middle East ” “ Islamic money represented slightly in excess of 30% of the book” 45bp Dubai Civil Aviation US$ 1bn, 5 yr Sukuk, (Dec 2004) Bookrunners’ Comments Launch Spread Issue
  9. 9. Expansion & Innovation: Secondary Market Sukuk secondary market activity – still very limited: <ul><li>Over 100 Sukuk issues listed on Bloomberg (SUKU) –only a small minority are priced </li></ul><ul><li>Very few secondary trades </li></ul><ul><li>Primary market still to gain critical mass </li></ul><ul><li>Islamic investors on a “learning curve” too </li></ul>Source: SUKU pages Bloomberg
  10. 10. Expansion and Innovation <ul><li>Global spread: Islamic finance is spreading beyond the GCC and South-East Asia: </li></ul><ul><ul><li>Germany August 2004: Anhalt-Saxony €100m Sukuk </li></ul></ul><ul><ul><li>Kazakhstan March 2005: US$50m commodity murabaha for Bank TuranAlem </li></ul></ul><ul><ul><li>Turkey October and December 2005: US$50m commodity murabaha for TSKB and US$44m “true” murabaha for FFK Fon Leasing ** </li></ul></ul><ul><ul><li>USA June 2006: US$165m Sukuk for East Cameron Partners (Texas) </li></ul></ul><ul><ul><li>Japan August 2006: JBIC US$300-500m Sukuk issue announced and still “under investigation” </li></ul></ul><ul><ul><li>China September 2006: US$250m Sukuk announced to finance a Chinese power project </li></ul></ul><ul><ul><li>UK April 2007: Government to review feasibility of Sukuk issue </li></ul></ul><ul><ul><li>UK May 2007: £225m Islamic LBO for Aston Martin acquisition from Ford Motor Company by The Investment Dar and consortium ** </li></ul></ul><ul><li>** Sole arranger: WestLB </li></ul>
  11. 11. Islamic Finance – Focus on the UK <ul><li>UK initiatives : </li></ul><ul><ul><li>Labour Government: </li></ul></ul><ul><ul><ul><li>&quot; long-term ambition to make Britain the gateway to Islamic finance and trade“ </li></ul></ul></ul><ul><ul><ul><li>Aiming to make the City of London one of the world‘s leading centres for Islamic finance </li></ul></ul></ul><ul><ul><li>Retail focus in the UK: &quot;Islam is Britain's second-largest faith, and Muslims are involved in every walk of British life“ </li></ul></ul><ul><ul><ul><li>Islamic Bank of Britain </li></ul></ul></ul><ul><ul><li>Wholesale Islamic banking in the UK: &quot;Islam is Britain's second-largest faith, and Muslims are involved in every walk of British life“ </li></ul></ul><ul><ul><ul><li>European Islamic Investment Bank </li></ul></ul></ul><ul><ul><ul><li>Bank of London and the Middle East </li></ul></ul></ul><ul><ul><ul><li>Further licence applications with the FSA </li></ul></ul></ul><ul><ul><li>Legislation to facilitate the offering of Islamic finance products in the UK: </li></ul></ul><ul><ul><ul><li>“ Alternative financing arrangements” </li></ul></ul></ul><ul><ul><ul><li>Initial retail focus </li></ul></ul></ul><ul><ul><ul><li>Finance Act 2005: ijara structures extended to commercial property </li></ul></ul></ul><ul><ul><ul><li>Finance Act 2006: wakala and diminishing musharaka </li></ul></ul></ul><ul><ul><li>Finance Bill 2007 for Sukuk issues to be treated for tax purposes as conventional issues </li></ul></ul><ul><ul><li>UK Sovereign Sukuk Issue: feasibility study announced in April 2007 </li></ul></ul>
  12. 12. “ The name’s Bond….Islamic Bond”
  13. 13. Aston Martin: first fully Sharia-compliant LBO in the UK <ul><li>WestLB is Mandated Lead Arranger, Underwriter and Bookrunner </li></ul><ul><li>Joint Mandated Lead Arrangers: </li></ul><ul><ul><li>Bahrain Islamic Bank </li></ul></ul><ul><ul><li>EIIB </li></ul></ul><ul><ul><li>Standard Bank </li></ul></ul><ul><li>£225m Islamic facilities: </li></ul><ul><ul><li>£200m term </li></ul></ul><ul><ul><li>£25m revolver </li></ul></ul>
  14. 14. Aston Martin - Day 1: Commodity Murabaha Structure <ul><li>Aston Martin transaction: </li></ul><ul><li>MLA, Underwriter and Bookrunner: WestLB </li></ul><ul><li>Murabaha Agreement between Bidco and WestLB as Investment Agent </li></ul><ul><li>Mudaraba Agreement between WestLB and the syndicate banks </li></ul><ul><li>Two tranche structure: </li></ul><ul><ul><li>£200m term facility </li></ul></ul><ul><ul><li>£25m revolving facility </li></ul></ul><ul><li>8 year final maturity, 5 year put option </li></ul><ul><li>Profit rate 3 or 6 month LIBOR + 295bp </li></ul>1. Participations 4. Metals Investment Agent (WestLB) Participants Metals Supplier 2. Metals 3. Spot payment Bidco 5. Metals 6. Spot payment Metals Buyer 7. Deferred payment
  15. 15. Aston Martin - long-term structure: Musharaka <ul><li>Facility commitments </li></ul><ul><li>AML identifies Asset Pool to contribute to Musharaka </li></ul><ul><li>Purchase price for interest in Asset Pool </li></ul><ul><li>IA and AML co-own assets </li></ul><ul><li>Balance of cash to Musharaka to apply to the co-owned assets </li></ul><ul><li>Co-owned assets transferred to Musharaka </li></ul><ul><li>IA leases its interest in its proportion of the co-owned assets back to AML </li></ul><ul><li>Purchase undertaking – exerciseable on event of default </li></ul><ul><li>AML appointed as manager of Musharaka </li></ul>Participants Aston Martin Lagonda Investment Agent Musharaka JV (managed by Aston Martin Lagonda) Co- owned Assets Asset Pool Co-ownership interests 1. £ 3. £ 2. £ Lease Agreement Purchase Undertaking Management Agreement WORK IN PROGRESS
  16. 16. Saudi Arabia - First Off-Shore Sukuk ABC Islamic Bank (E.C.); Arab National Bank; Standard Bank Plc; Unicorn Investment Bank, B.S.C. (c); and WestLB AG, London Branch Joint Lead Managers and Joint Bookruners Sukuk al-Ijara Issue Type US$ LIBOR plus 200bp Coupon 3-month US$ LIBOR Floating Rate 3 years, bullet Maturity DAAR International Sukuk Company (a limited liability company incorporated in the Cayman Islands) Issuer US$600,000,000 Trust Certificates due 2010 Issue Dar Al-Arkan Real Estate Development Company (DAAR) Guarantor
  17. 17. Dar Al Arkan US$600m Sukuk Al Ijara SAUDI SPV DAAR ISSUER (DAAR International Sukuk Co.) SUKUK HOLDERS Sale Proceeds (US$) Sale of Real Estate Assets Issue Proceeds (US$) Guarantee 3 Year Lease Lease Payments On-shore Offshore Certificates Payment for Real Estate Rights (US$) Transfer of Real Estate Rights
  18. 18. Stimulants for Continued Growth <ul><li>Expansion of Islamic banking system – eg, in the GCC and UK </li></ul><ul><li>GCC funding needs </li></ul><ul><ul><li>Infrastructure requirements/real estate </li></ul></ul><ul><ul><li>Corporate “Islamicisation”: listed companies and family companies </li></ul></ul><ul><li>Europe </li></ul><ul><ul><li>Event-driven financing </li></ul></ul><ul><ul><li>Continued FDI </li></ul></ul><ul><li>Asia: widening interest following Malaysia’s lead (Singapore, Japan, Indonesia, Thailand) </li></ul><ul><li>Developing harmonisation/standardisation </li></ul><ul><ul><li>Central Bank of Bahrain </li></ul></ul><ul><ul><li>AAOIFI </li></ul></ul><ul><ul><li>Islamic Financial Services Board </li></ul></ul><ul><li>Gaps in the market </li></ul><ul><ul><li>Islamic Sukuk/Mudarabah funds </li></ul></ul><ul><ul><li>Securitisation </li></ul></ul>
  19. 19. WestLB Contacts Islamic Finance – Origination & Structuring David McCaig Telephone (+44) 20 7020 7532 Head of Emerging Markets Fax (+44) 20 7020 7530 Managing Director e-mail [email_address] David Testa Telephone (+44) 20 7020 3622 Head of Islamic Finance Fax (+44) 20 7020 7530 Executive Director e-mail [email_address] Mobile (+44) 7770 435 312 Walid Sarieddine Telephone (+ 44) 20 7020 7533 Director Fax (+ 44) 20 7020 7530 e-mail [email_address] Mobile (+44) 7769 670 660 Sami Neffati Telephone (+ 44) 20 7020 7523 Manager Fax (+ 44) 20 7020 7530 e-mail [email_address] Mobile (+44) 7825 420 765