1	Sukuk: Creation and Movement of Capital Neale Downes Partner, Regional Head of Banking & Finance 14 January 2008
2	A few “facts” To end 30 September 2007 global sukuk issuance was US$24.5 billion ^{(Source – Moody’s)} However, approx US$10bn issuance postponed in Q4 2007 GCC sukuk issuance Q1-Q3 accounted for US$13.2 bn ^{(Source – Moody’s)} In comparison to bonds and other conventional fixed income instruments, volume still low Most market participants expect strong growth as it fills an important gap for the Muslim investor
3	What are sukuk? “Islamic bonds” – misnomer Sukuk is the Arabic name for a “certificate” Sukuk represent an undivided proportionate ownership interest in an asset with the corresponding right to the Islamically acceptable income streams generated by the asset Underpinned by genuine assets/transactions Not simply issuer credit risk Profit-sharing transaction
4	Drivers of market growth Liquidity being applied to invest in a broadening range of Shari’a compliant financial instruments Investors seeking instruments which produce regular returns (fixed income) Shift to Islamic financing techniques – “financial correctness”/ “SRI” Mega projects – huge financial requirements, multi-tranched/sourced (project bonds) A way to keep funds working for the benefit of the local economy – fundament of Islamic finance
5	Drivers of market growth (cont.) Another example of Islamic products “catching up” or replicating conventional financial products Liquidity management tool – asset/liability mismatches for IFIs Basle II approaching – risk management approach Increasing participation of large international players – HSBC Amanah, Citi Islamic, BNP Paribas, Barclays Capital, Deutsche Broader appeal – Saxony/Anhalt Sukuk issue
6	Core features Tradable Sharia-compliant capital market product providing medium to long-term fixed or variable rates of return Attractive pricing/yields (cf: conventional bond pricing) Credit quality assessed and rated by international rating agencies Easy and efficient settlement and possibility of capital appreciation of the Sukuk Listing opportunities – tapping wider sources of capital (DIFX/LSE/Singapore/Luxembourg) Tradeable - provides investors with the flexibility to exit the investment at any time
7	Types of Sukuk Mudaraba sukuk Musharaka sukuk Ijara sukuk Murabaha sukuk Istisna’a sukuk Salam sukuk
8	Recent sukuk issues of note SABIC US$800m sukuk (on balance sheet) first CMA approved, first listed and traded on Tadawul, redeemable DP World US$3.5bn sukuk, to part finance P&O acquisition, listed on DIFX, partially convertible to PCFC subsidiary stock Nakheel US$3.52bn sukuk, to finance future expansion and projects, listed on DIFX, convertible/option on Nakheel group IPO, ratcheted coupon, predominantly European investors Dana Gas US$875m convertible sukuk (October 2007 – first “benchmark” issue since the summer)
9	Obstacles Still a need to “de-mystify” the product Development constrained by limited number of knowledgeable market participants Need to be asset-backed or project-based Limited liquidity: trading floors, assets often held to maturity, no market makers Still limited size of primary market Short tenors (cf: conventional bond tenors) Negotiability (murabaha) Shariah Committee interface Costs; frequency
10	Obstacles (cont.) Regulatory interface – current lack of harmonised rules or financial standards (“Malaysia .vs. the Arab world”) Complex and document intensive Benchmarking/indexes/rating – a disappearing issue? (June 2005 - US-based Dow Jones Islamic Market Index Group announced its Islamic bond index) Risks – interest rate/foreign exchange/commodity/credit/liquidity/performance/Shari’a compliance/asset risk
11	Legal Issues Vehicle selection Bankruptcy remoteness/true sale/OBS Transfer of collateral Priority and enforceability of security interests relating to the underlying assets Tax considerations Foreign ownership of certain assets (land)
12	Recent past and the future? Sub-prime crisis/credit crunch – cancelled and postponed issues Widening margins – Dana 7.5% return Market expected to “rebound” in Q1 & 2 2008 Listing/wider proliferation Asian and US market developments (East Cameron) Regulatory development and reform Long-dated sukuk (early redemption still a feature)
13	Recent past and the future? Securitisation Project bonds - refinancing Embedded options (callable and puttable sukuk) – gharar? Convertibility (non-traded sukuk) Harmonisation
14	Contact details Neale A. Downes – Partner Trowers & Hamlins PO Box 3012 Manama Kingdom of Bahrain Tel: + 973 17 515600 Fax: + 973 17 535616 ndownes@trowers.com