Goldman advisor defends $2 bln Islamic bond scheme

Πηγή: The Dailiy News Egypt
By  Andrew Torchia / Reuters
Jan 2 2012

DUBAI: An advisor to Goldman Sachs has defended the US bank's $2 billion Islamic bond program against criticism it may contravene religious principles, in a controversy that could affect Western banks' ability to enter the Islamic debt market.

In October, Goldman registered the sukuk program with the Irish Stock Exchange. It set up a Cayman Islands-registered special purpose vehicle, Global Sukuk Co Ltd, to issue a sukuk based on murabaha, a cost-plus-profit arrangement which complies with Islamic law.

Some analysts however have suggested Goldman might use the proceeds of the issue to lend money to clients for interest, which would be against Islamic law, and that the issue might not trade at par value on the Irish exchange, which would also contravene sharia law.

Asim Khan, managing director at Islamic finance advisory firm Dar Al Istithmar, said such speculation was groundless.

"Bulge-bracket banks such as Goldman Sachs can bring to Islamic finance their sophistication and depth of experience in liquidity management and equity/quasi-equity investment, which can take Islamic finance closer to its true ideals, so long as they adhere to the generally accepted sharia principles," Khan said.

"So far there is no basis to speculate otherwise," Khan, whose London- and Dubai-based company advised Goldman on the sukuk, wrote in a column contributed to Reuters. (For the full column, click on).

As the euro zone debt crisis poisoned conventional debt markets last year, several big Western banks considered raising money through Islamic finance, which is based on religious principles and bans the payment of interest and pure monetary speculation. The Arab Gulf, home to billions of dollars of Islamic investment funds, has been relatively untouched by the financial crisis.

HSBC's Middle East unit became the first Western bank to issue a sukuk last May with a $500 million Islamic bond carrying a maturity of five years. French bank Credit Agricole has said it is considering issuing an Islamic bond or creating a wider sukuk program that could lead to several issues.

Unlike HSBC with its HSBC Amanah brand, however, Goldman does not have an established presence in the Islamic banking sector, and its entry into the market has caused controversy.

Mohammed Khnifer, an Islamic finance analyst in Saudi Arabia, wrote that Goldman might use the proceeds of the sukuk to fund conventional banking activities. He suggested the sukuk might trade on the Irish exchange at levels other than par value, which would be impermissible under sharia law, and that the underlying structure of the sukuk might not be murabaha but reverse tawarruq, which has been ruled unacceptable by some Islamic scholars as an effort to hide the use of interest.

In his column, Khan wrote that the prospectus clearly showed the proceeds of the sukuk would not be used to lend money to Goldman clients for interest.

"Goldman Sachs, as an investment bank and as a proprietary commodity trader, has invested billions of dollars in commodities and will use the murabaha commodities in its commodity trading business, which will partly replace the conventional funding with Islamic finance," he wrote.

Khan said the prospectus had informed investors that the sukuk should only be traded at par value, and had warned investors there was not expected to be a secondary market in the instrument.

He argued that the Goldman deal had a legitimate murabaha structure. "One would have to stretch one's imagination a bit too far to label such a vanilla murabaha transaction as a tawarruq," he wrote.

Khan also suggested Goldman's entry into Islamic finance could help the industry overcome obstacles hindering its expansion, including a shortage of tools to help banks manage their liquidity, and a lack of sufficient involvement by institutional funds.

"The benefits of a large investment bank's foray into Islamic banking could be significant," he wrote.

Controversies over the permissibility of financial instruments, which can affect investors' willingness to put money into them, have characterized Islamic finance since it was born in its modern form in the 1970s. A range of scholars and industry bodies set product standards which are sometimes contradictory and act as guidelines rather than firm, enforceable rules.

Goldman has said its sukuk could be denominated in United Arab Emirates dirhams, US dollars, Saudi riyals or Singapore dollars. It has not disclosed a time frame for issuance, but has insisted that Islamic scholars have given the program adequate certification that it complies with sharia principles.

Goldman runs into sukuk hurdle

Πηγή: FT
By Tom Braithwaiteand David Oakley

Dec 15 2011

Goldman Sachs is facing obstacles to the launch of its first Islamic bond, with some experts warning its structure might breach sharia law.

The bank announced in October that it would offer a $2bn sukuk, securities designed to comply with Islamic law forbidding usury, via a Cayman Islands-registered vehicle listed on the Irish Stock Exchange.

The exotic offering would be the first foray into the market for Goldman, which enlisted Dar Al Istithmar Limited, a UK-based Islamic finance consultancy, to advise it on the structure of the sukuk and check its compliance.

But other experts say the offering may flout the rules. Mohammed Khnifer, a Saudi Arabia-based sharia adviser, said there were at least three “flaws” in the structure that he believed would disqualify the offering from sharia compliance.

First, the prospectus suggested that underlying assets used in the sukuk could be sold to a third party; second that the funds raised could be directed to Goldman itself; and third that there was no guarantee the securities would trade at par. Any of those might breach the complex rules required to be compliant.

Lawyers who structure products to comply with Islamic law warn that, whatever the merits to the scholarly debate, investors may be deterred by the doubts. “Goldman can list this programme on the Irish Stock Exchange, but that does not mean they will get the buyers,” said one lawyer who specialises in the field. “They may well find there is not much demand because of the widespread doubts over the issue in the market.”

Goldman said: “We are entirely confident in the certification we received that our programme is in compliance with sharia law.”

Instead of a conventional bond offering, Goldman set up a vehicle in the Cayman Islands that will sell certificates to investors and use the funds to buy commodities. According to the prospectus, Goldman will buy the commodities from the Cayman vehicle with deferred payments. These then flow back to the original certificate holders, aping a bond yield without being pure interest.

Asim Khan, managing director at Dar Al Istithmar, hit back against the doubters, saying: “This particular transaction has been vetted and approved by various scholars [who are] very well known, very well reputed.” He said potential investors were also comfortable with the deal and said the negative commentary was ill-informed.

The niche nature of the sector could be seen as a weakness but increasing populations and oil wealth offer the potential for substantial growth

He said each of the concerns put forward by Mr Khnifer misconstrued the transaction. For example, Goldman’s other investment activities were irrelevant. “I can go to a bar and have an orange juice knowing that the bar is a totally non-sharia compliant entity but the transaction between me and the bar is totally sharia compliant,” said Mr Khan. “I got orange juice and I paid for orange juice.”

He added that Goldman would make use of the commodities and was not just flipping them to the original seller to create the illusion of a sale. And he said that the listing on the Irish Stock Exchange was for regulatory and tax purposes – scholars and potential investors did not anticipate a secondary market.

In its prospectus, Goldman advises that “as with any sharia views, differences in opinion are possible”. It says that its advisers say the certificates can only be traded in the secondary market at par value but investors should “make their own determination as to the future tradeability of the certificates on any secondary market”.

There has been $22.7bn of sukuk debt issued globally so far this year, the most since before the financial crisis, according to Dealogic. Issuance peaked in 2007 when $27.2bn was issued.

MIDEAST DEBT-Turkey may become major sukuk source for Gulf investors

Πηγή: Reuters
By Shaheen Pasha and Rachna Uppal
Nov 3 2011

* Strong Gulf demand for second Turkish sukuk
* Sukuk outperforming conventional bonds in secondary market
* Turkish laws allow attractive structures
* But Turkish non-financial issuers not coming to market
* Sovereign sukuk would be big boost; unclear when it will come

DUBAI, Nov 3 (Reuters) - Strong demand for a sukuk issued by Turkish bank Kuveyt Turk last month underlines how Turkey may become a major source of Islamic bonds for Gulf investors who are keen to diversify geographically.

The $350 million sukuk, issued at par and carrying a profit rate of 5.875 percent, was only the second sukuk issued from Turkey. But it attracted orders totalling over $550 million -- and Gulf investors accounted for nearly 70 percent of final subscribers, according to data released by the lead arrangers.

That may presage an important shift in investor interest. Traditionally, Gulf investors have not focused on bonds from Turkey, instead preferring debt from names in the immediate region with which they are most familiar and comfortable.

Now, however, the relatively comfortable way in which Turkey's economy is coping with global weakness -- combined with strong appetite for sukuk in general, since they have proved less volatile during this year's market instability than conventional bonds -- may be changing Gulf investors' priorities.

"Turkish government USD paper and bank paper have been in issuance for a number of years now, but have not been a focus of MENA market players as there have been plenty of more locally- issued and better-understood names out there," said Mark Watts, head of fixed income at National Bank of Abu Dhabi.

"There are signs that this is changing as the ever-present hunt for yield forces investors to widen their horizons. Sukuk from Turkey is a relatively new phenomena for GCC investors... Turkey's performance dynamics mean that any smart fund manager will want to take a look at gaining exposure."

STABILITY

Sentiment towards Turkish debt, like that towards other countries, has been hit by jitters over the European debt crisis; five-year Turkish sovereign credit default swaps surged to 251 basis points, 30 points wider on the day, in response to news on Monday that Greece would call a referendum on its bailout.

But Turkey, which is rated BB, Ba2 and BB+ by the three major rating agencies, slightly below investment grade, with positive outlooks from all of them, has not seriously underperformed Gulf credits. Its CDS are tighter than unrated Dubai and BBB-rated Bahrain, though wider than AA-rated Abu Dhabi and Qatar.

Also, the profile of sukuk investors favours a hold-to-maturity investment which makes secondary market trading of Islamic bonds less liquid, but also less volatile. This has helped sukuk in general perform better than many conventional bonds in recent months.

The yield on the first Turkish sukuk, a $100 million, three-year bond issued in 2010 by Kuveyt Turk , an affiliate of Kuwait Finance House , is down about 55 bps since end-2010 and up only 20 bps since the start of September, when the Greek crisis began worsening further. This is probably because there is minimal trading in the bond -- but it still underlines how sukuk, with their more conservative investor base, are less vulnerable to wide price swings.

By contrast, the yield on Turkey's 7 percent, $1.5 billion conventional sovereign bond, issued in 2008 and maturing in March 2019 , is up about 4 bps this year and 30 bps higher than its level at the start of September.

"The pricing in the (conventional) bond market is difficult. There is liquidity around in the sukuk market, so there might be better pricing," said Debashis Dey, partner at law firm Clifford Chance in Dubai.

A further attraction of Turkish sukuk is that legislative changes by Turkey this year have created a relatively favourable environment for Islamic debt issuance -- in some important ways, more favourable than the environment in the Gulf.

For example, last month's sukuk from Kuveyt Turk was able to combine asset-backed elements, including the sale and transfer of tangible real estate to an onshore special purpose vehicle, with asset-based elements; this increased the perceived safety of the bond for investors. In the Gulf, factors such as high land transfer fees make asset-backed deals more expensive and difficult.

OUTLOOK

Turkey's Bank Asya has completed roadshows for a potential five-year sukuk of up to $300 million, and one United Arab Emirates-based trader said there was "decent" interest from Gulf accounts in a deal. The trader said any issue was likely to come after the Eid al-Adha holidays in the region next week. Asya has mandated Citi and UBS for the deal.

Another bank, Albaraka Turk , has awarded a mandate for a sukuk of around $200 million which it wants to issue before year-end, its general manager Fahrettin Yahsi told Reuters in September.

For Turkey to become a major issuer of sukuk, however, it will have to move beyond bank issues of sukuk to issues by a wide range of companies. This may prove difficult, at least in the short term with the global economy so weak; the International Monetary Fund expects Turkey's economic growth to slow to 2.5 percent next year from 7.5 percent this year.

"We have recently almost exclusively seen Turkish financial institutions come to market to raise funds, either through conventional or Islamic paper," said Rizwan Kanji, debt capital markets partner at law firm King & Spalding, who advised on the Kuveyt Turk sukuk.

"One primary reason may be because the Turkish banking sector is highly regulated and supervised and therefore faring relatively better than other non-financial sector-related industries in Turkey."

Another big question is whether the Turkish government will issue a sovereign sukuk, which could give a big boost to the market by providing a benchmark off which other Turkish Islamic debt could price.

"It's time for the Turkish government to issue a sovereign sukuk as a starter and that will hopefully be followed by other institutions and banks," said Mohieddine Kronfol, chief investment officer at Franklin Templeton Investments in Dubai.

"Certainly if that happens it will be very good for Turkey and very good for the Islamic banking industry."

A sovereign sukuk may be a step the country is not yet ready to take, however. Prime Minister Tayyip Erdogan's ruling AK Party, a socially conservative but economically liberal party with roots in political Islam, might well favour such an issue, and the government has previously indicated it could issue a sukuk to diversify its funding options.

But issues such as pricing and Turkey's desire to satisfy appetite for its conventional debt may continue to delay a sovereign sukuk. Also, a need to accommodate secular sentiment -- because of Turkey's secular tradition, Islamic banks are referred to in the country as "participation banks" -- means the government may wait a while.

"I think the fact that they are a secular nation and they made an effort to leave religion out of financial factors has been a contributing factor" to the lack of a sovereign sukuk so far, Kronfol said.

"But it doesn't make sense, especially since you have countries like Luxembourg and France issuing guidelines to issue sukuk."

Legislation for a Turkish sovereign sukuk is in place but there has been no clear signal from the government on its intentions for the past couple of years. The Treasury's new financing programme for 2012 includes the sentence, "Depending on market conditions, new external or domestic debt instruments may be issued."