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While Malaysia continues to
dominate sukuk issuance, some mega-deals announced in the past two years
point to bright prospects elsewhere in the Islamic world.
Billions of dollars worth of
sukuk bonds have been issued this year, indicating a continuing boom in the
use of fundraising instruments that comply with sharia (Islamic law). High
oil prices and greater customer awareness are driving demand from Islamic
institutional and private investors for investments that avoid the
prohibited areas of riba (interest), gharar (uncertainty) and maysir
(gambling). Issuance has already reached $41 billion worldwide, and is
growing fast. Abdullah al Muajel, head of the sharia control department at
Al Rajhi Bank in Riyadh, expects this to rise to $150 billion by the end of
2010.
To meet this demand, the sukuk market (see box) will have to expand into new
areas - and a few large and innovative sukuk deals this year may point the
way. January 2006 saw the launch of the largest sukuk to date, an issue by
the Dubai Ports, Customs and Free Zone Corporation (PCFC), arranged by Dubai
Islamic Bank, and listed on the Dubai International Financial Exchange.
Intended to raise funds for PCFC's takeover of UK port operator P&O, through
its Dubai Ports World subsidiary, the sukuk was oversubscribed more than
four times, receiving a total of $11.4 billion in bids. This demand led PCFC
to increase issuance from $2.8 billion to $3.5 billion.
But it is not just the size of the PCFC sukuk that has attracted attention
of Islamic financiers. PCFC, in anticipation of an initial public offering
(IPO) at some point in the future, structured it as a convertible sukuk. Up
to 30% of the sukuk can be redeemed into PCFC shares if an IPO goes ahead in
the next two years - otherwise, the sukuk produces a higher yield at
redemption, 10.125% a year rather than 7.125%.
The deal was based on a musharaka (venture capital) arrangement. The two
partners in the musharaka structure were PCFC, which contributed $1.5
billion in kind, and a special-purpose vehicle (SPV), PCFC Development FZCO,
which contributed the $3.5 billion raised by the sukuk. The key to the deal
was the SPV's establishment of an English law trust over its right to share
the joint venture's profits - selling the trust certificates gave investors
a share of profits.
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