Islamic Finance and Sukuk Market Review
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Islamic Finance and Sukuk Market Review. December 2008. Principles of Islamic Finance. Islamic finance is an ethical and equitable mode of finance which derives its principles from the Quran (the Holy Book) and the Sunnah (the traditions of the Prophet Muhammad)

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Islamic finance and sukuk market review

Islamic Finance and Sukuk Market Review

December 2008


Islamic finance and sukuk market review

Principles of Islamic Finance


Islamic finance and sukuk market review

Islamic finance is an ethical and equitable mode of finance which derives its principles from the Quran (the Holy Book) and the Sunnah (the traditions of the Prophet Muhammad)

While Shariah law prohibits interest, this does not mean that capital is costless in an Islamic system

Islam recognizes capital as a factor of production but it does not allow the factor to make a prior or predetermined claim on the productive surplus in the form of interest

Profit-sharing is the method recommended by Islam

In Islam, the owner of capital can legitimately share the profits made by the entrepreneur

What makes profit sharing permissible in Islam, as opposed to interest, is that in the case of the former it is only the profit-sharing ratio, not the rate of return itself, that is predetermined

Principles of Islamic finance

Profit-sharing methodology drives Islamic finance

solutions


Islamic finance and sukuk market review

Any predetermined payment over and above the amount of principal is prohibited

The investor must share in the profits or losses arising out of the enterprise or commercial activity for which the capital was provided

As defined in the Shariah, Islamic finance is based on the belief that the provider of capital and the user of capital should equally share the risk of business ventures

Islamic finance is fundamentally based on assets

Money is only a medium of exchange, a way of defining the value of asset; it has no value in itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or lent to someone else

Gharar (Uncertainty, Risk or Speculation) is also prohibited

This term denotes a contract between two parties where one may be exploited

This includes misdescription or ignorance of goods, or their price; encompasses a sale of goods which the seller is not in a position to deliver; and/or the making of a contract which is conditional upon an unknown event

Investments should only support practices or products that are not forbidden or discouraged by Islam (Alcohol, Armaments, Tobacco)

Principles of Islamic finance (cont)

Compliance with Islamic principles


Islamic finance and sukuk market review

Industry evolution: growth over the last 30 years

The Islamic finance industry has grown rapidly over the past ten years

  • Islamic finance has followed in the wake of innovations in the global financial services industry

  • A natural progression of the Islamic finance industry

  • Competitive retail landscape

  • Increasingly sophisticated corporate banking products

  • Innovative capital market solutions


Islamic finance and sukuk market review

Major instruments in Islamic finance

Islamic finance encompasses a wide range of products comparable to traditional banking products – from current accounts and home financing to syndicated finance and capital markets – which have been adapted to comply with Sharia requirements

Sukuk—representing certificates of ownership— straddle a majority of Islamic finance structures


Islamic finance and sukuk market review

Sukuk – An Overview


Sukuk an overview

Sukuk – an overview

Sukuk is a Shariah compliant capital market instrument

By nature, it is analogous to conventional asset backed securities (with several exceptions)

Business activities/assets that would be used as underlying assets backing the Sukuk would need to be Shariah-compliant. The proceeds of the Sukuk must be used for Shariah-compliant purposes only

Government of Bahrain (2001), Government of Malaysia (2002), State of Qatar (2003), Department of Civil Aviation, Dubai (2004), Government of Pakistan (2005), Government of Brunei (2006) and Ras Al Khaimah Investment Authority (2007)

Can be structured as a Regulation S and Rule 144A transaction and rated by an international rating agency

Sukuk can be issued under various structures

The most widely used one is Sukuk Al-Ijara, a lease based instrument

The primary subscriber can resell the Sukuk in the secondary market; the secondary market buyer will be the new pro-rata beneficial owner of the underlying assets

Sukuk vs. Conventional Bond


Islamic finance and sukuk market review

Summary of Sukuk Structures


Sukuk ijara with tangible assets

Sukuk Ijara with tangible assets

Most widely used structure and accepted Sukuk structure

Islamic lease-based securities, similar to Equipment Trust Certificates and Unit Trusts

Tradable in secondary market

Main Documentation:

Purchase Agreement

Lease Agreement

Service Agency Agreement

Purchase Undertaking

Sale Undertaking

Declaration of Trust


Sukuk ijara with tangible assets and istisna contracts

Sukuk Ijara with tangible assets and Istisna’ contracts

Allows Issuer to execute a Sukuk Ijara even if there is a lack of tangible assets to achieve benchmark sized financing

Accepted by Shariah

Main Documentation:

Purchase Agreement

Lease Agreement

Istisna Agreement

Service Agency Agreement

Purchase Undertaking

Sale Undertaking

Declaration of Trust


Islamic finance and sukuk market review

Sukuk Market and GCC Market Overview


Islamic finance and sukuk market review

Saudi Arabia

UAE

Qatar

Bahrain

Kuwait

Pakistan

Indonesia

Europe/USA

AED

SAR

USD & EUR

Other Local Currency

Volume & Number

2004*

2006

2008 (YTD)

Summary

0-3

4-5

6-10

>10

-44%

  • The UAE and Saudi Arabia remain the largest Sukuk markets by volume issued

  • In 2008 the c. US$5bn Sukuk were issued out of the UAE through 8 issues (US$1.6bn through 2 for Saudi Arabia)

  • Indonesia led the largest number of issuances in 2008 with 9 Sukuk (note all domestic)

Country

  • A shift to local currency issuances—in the wake of a weak dollar—is the evident trend from 2006 into 2008

  • In 2008 USD/EUR issuances only comprised 9% of the total; compared to 75% of the total issuances in 2004

  • The revaluation story attracted significant hedge fund activity in the region

Currency

  • 5-year tenor remains sweet spot for Sukuk issuers

38%

62%

Tenor

Rest of World

Malaysia

Sukuk market: trends and themes

Due to the global credit crisis volume has fallen dramatically

In 2008(YTD) c. US$7.8 billion has been issued, compared to c. US$13.8 in 2007

Malaysia vs. ROW

  • Source: Dealogic, HSBC Amanah Analysis;

  • Country, currency, tenor analysis is based on domestic and international issuances excluding Malaysia (19 November 2008)


Islamic finance and sukuk market review

Britain begins bank nationalization with GPB37bn injection (RBS, Lloyds & HBOS)

U.S. Fed takes over Freddie & Fanny

UAE offers US$13.6bn to domestic banks; guaranteees deposits and interbank lending

Saudi injects additional funds into the banking sectors following US$3bn in October

Saudi cuts repo rates and reduces reserve requirements

Merrill sold to Bank of America; Lehman files for Chp. 11; and AIG recieves US$85bn

Crisis spreads to Europe

Iceland nationalized banks; seeks US$6bn from IMF

Kuwait guarantees all local deposits; suspends trading of Gulf Bank

Qatari government begins purchasing equity stakes in local banks

MoF adds US$19bn injection

Amlak and Tamweel merge under a government owned entity

Abu Dhabi

Qatar

EIBOR vs. LIBOR

EIBOR

HSBC/DIFX Sukuk/Bond Index (Libor Spread)

MSCI GCC Index

LIBOR

GCC market developments

The GCC has not been ensconced from the global credit crisis

Like many emerging markets, the worst may be yet to come

CDS Spreads (5yr)

*Source: Bloomberg; HSBC Analysis


Islamic finance and sukuk market review

3 Year Performance

Dubai

Kuwait

Saudi Arabia

Regional equity performance

Regional equity markets have been hammered over the past few months

The real estate sector—most significantly in Dubai—has lead the dive

*Source: Bloomberg


Islamic finance and sukuk market review

+950

+1000

+900

+740

+725

+800

+710

+690

+650

+700

+600

+445

+500

+370

+360

+325

+325

+400

+285

+300

+215

+210

+195

+150

+200

Govt

+100

Current

+

Year Ago

ABC

NCB

TAQA

ADCB

Dubai

Samba

Bahrain

RasGas

Bank

Mashreq

Group

Bank

Dubai

Emirates

Emirates

DP World

Qatar Gov

Holdings

Saudi Gov

Gov

Abu Dhabi

GCC market update: pricing environment

Regional CDS spreads have widened significantly over the past month

In particular Dubai sovereign and sovereign-linked CDS spreads have widened by c.200bps over the past month

Credit spreads on debt from all sectors have increased dramatically as witnessed by the HSBC/DIFX Indexes

Regional CDS Spreads*

+950

+1000

+900

+740

+725

+800

+710

+690

+650

+700

+600

+445

+500

+370

+360

+325

+325

+400

+285

+300

+215

+210

+195

+150

+200

+100

+

ABC

Bahrain Gov

NCB

TAQA

ADCB

Abu Dhabi Gov

Samba

Dubai Gov

RasGas

Bank

Mashreq

Group

Qatar Gov

Bank

Dubai

Saudi Gov

Emirates

Emirates

DP World

Holdings

HSBC-DIFX Indexes

*Source: Bloomberg; HSBC Analysis (17 November 2008)


Islamic finance and sukuk market review

Kuwait

Saudi Arabia

Qatar

UAE

Timing

29th October 2008

12th October, 24 November 2008

13th October 2008

12th October, 24 November 2008

Details

  • The Kuwaiti government has approved a bill to guarantee bank deposits and will seek parliamentary approval for this shortly.

  • Saudi Arabia has committed that it would make up to SR 150bn (USD 40bn) available to its banks, if required.

  • Saudi Arabia cut its repo rate by one percent and reduced cash reserve requirements by 3% to boost liquidity

  • Qatar launched a US$5.3 billion plan to buy bank shares.

  • In the plan, the Qatar Investment Authority, the state’s sovereign wealth fund, will buy between 10-20% of banks’ listed capital on the Doha exchange.

  • Announced that it will guarantee retails deposits in local banks and inter-bank lending among all banks operating in the country. Further on the 14th of October, Sheikh Mohammed ordered AED 70bn to the Ministry of Finance to inject further liquidity to banks.

  • The UAE has previously injected AED50bn of liquidity for interbank lending

  • UAE forms Emirates Development Bank out of two largest lenders

Considerations

  • Further to the announcement of Kuwaiti government support for local deposits, the Government has also announced that it will take an equity stake in Gulf Bank KSC, the second largest lender in Kuwait by assets.

  • The steps announced were designed as preventative measures against the current financial turmoil and to maintain confidence in the financial markets

  • The steps announced were designed as preventative measures against the current financial turmoil and to maintain confidence in the financial markets.

GCC government support


Islamic finance and sukuk market review

Key Islamic Investors

Growing Islamic Investors

Islamic finance investor base

Islamic Assets: Global Distribution

Islamic Issuers

Islamic Investors

More than two thirds of Islamic funds are from the Middle East

*Source: Bloomberg; HSBC Analysis (17 November 2008)


Islamic finance and sukuk market review

Typical geographical and investor type distribution

Comments

Corporate Jumbos (144a)

  • Many corporate borrowers take advantage of the 144a market to target the U.S. institutional investors base in global jumbo transactions

Senior Financial (RegS only)

  • Historically distributed into local as well as European banks and funds

  • Last primary market bonds were placed at the beginning of 2007

LT2 Financial(RegS only)

  • Trades at significant premium to senior presently (250bps to 400+bps)

  • Any new issue would require strong local sponsorship to gain traction with the global investor base and would probably only follow after a successful senior issuance out of the region

Sukuks

  • Predominately driven by and distributed into the local Islamic accounts with some additional follow-on demand from Asian and European Islamic funds

Local Currency

  • Started as hedge fund driven bet on a possible de-pegging of the local currency from the US$

  • Has then been further taken up by local accounts but demand for this product has started to dry up

Middle East investors by products


Islamic finance and sukuk market review

HSBC Islamic Finance Credentials


Hsbc amanah a powerhouse in islamic capital markets

BankUSD $ mIssuesMkt Shr

1HSBC1,389.37334.1%

2Calyon666.58116.4%

3RBS601.85414.8%

4Barclays Capital500.00212.3%

5Ntnl Bk of Abu Dhabi500.00212.3%H

BankUSD $ mIssuesMkt Shr

1HSBC3,842.36715.8%

2Barclays Capital2,824.68811.7%

3JP Morgan2,076.7338.6%

4Dubai Islamic Bank1,800.7877.4%

5Deutsche Bank AG1,653.7846.8%

September 2008

September 2008

September 2008

July 2007

July 2007

November 2007

November 2007

August 2008

August 2008

December 2006

Saudi Bin

Ladin

Group

Saudi Electricity Company

Saudi Electricity Company

Ras

Ras

Al

Al

Khaimah

Khaimah

Investment

Investment

Saudi Basic Industries Co

Saudi Basic Industries Co

Abu Dhabi Islamic Bank

Authority

Authority

US$800 million

US$800 million

Sukuk

Sukuk

US$325 million

US$325 million

Sukuk

Sukuk

SAR 5 billion

SAR 5 billion

Sukuk

Sukuk

SAR 5 billion

SAR 5 billion

Sukuk

Sukuk

SAR 1 billion

SAR 1 billion

SAR 1 billion

Sukuk

Sukuk

Sukuk

Sole Lead Manager and

Sole Lead Manager and

Sole Lead Manager and

Joint Bookrunner

Joint Bookrunner

Sole Bookrunner

Sole Bookrunner

Joint Bookrunner

Joint Bookrunner

Sole Bookrunner

Bookrunner

Bookrunner

Bookrunner

MENA Region Domestic Bonds 2008 YTD

GCC Sukuk Issuance 2007– 2008 YTD

HSBC Amanah: a powerhouse in Islamic capital markets

HSBC has been the clear and consistent number one lead manager of GCC bond issuances each year since 2003, both by number and volume of new issues

HSBC will bring unparalleled experience and market intelligence to the lead management of Sukuk/ Bond issuance

HSBC has developed the most comprehensive investor coverage and knowledge inside and outside the Middle East for regional Sukuk/ Bond issuance

Source: Bloomberg, 15th Oct, 2008

Source: Bloomberg, 15th Oct, 2008

Selected GCC Sukuk issues

Selected Awards


Islamic finance and sukuk market review

US$225m Sukuk

Sharjah Islamic Bank

Sole Bookrunner

SAR 5bn Sukuk

Saudi Electricity Company

Sole Bookrunner

SAR 8bn Sukuk

Saudi Basic Industries Co.

Joint Bookrunner

US$300m Sukuk

Qatar Real Estate Investment Co.

Sole Bookrunner

SAR 5bn Sukuk

Saudi Basic Industries Co.

Joint Bookrunner

US$1,000m Sukuk

Department of Civil Aviation Dubai

Joint Bookrunner

US$200m Sukuk

Gulf Finance House

Joint Bookrunner

US$325m Sukuk

Ras Al Khaimah Investment Authority

Joint Bookrunner

SAR 3bn

Saudi Basic Industries Co.

Sole Bookrunner

US$200m

National Central Cooling (TABREED)

Joint Bookrunner & Global Coordinator

US$200m Sukuk

Amlak Finance

Sole Bookrunner

US$500m Sukuk

Islamic Development Bank

Joint Bookrunner

US$550m Sukuk

Emirates

Joint Bookrunner

US$700m

State of Qatar

Sole Bookrunner

US$800m Sukuk

Abu Dhabi Islamic Bank

Sole Bookrunner

2004

2006

2006

July 2007

July 2007

2006

2006

2005

2006

July 2007

August 2007

2005

2005

August 2008

November 2007

HSBC Amanah GCC Sukuk credentials

The HSBC Amanah Sukuk team, based in Dubai and Riyadh, has been active since 2000 and has been the clear leader in the Sukuk market—in terms of deal size, issuances, and innovation—ever since


Islamic finance and sukuk market review

US$ Global Islamic Bonds 2002 to 2007

Bank

Bank

Bank

USD $ m

USD $ m

USD $ m

Issues

Issues

Issues

Mkt

Shr

Mkt

Mkt

Shr

Shr

1

HSBC

1

1

HSBC

HSBC

7,723

7,723

7,723

19

19

19

21

21

21

2

Barclays Capital

2

2

Barclays Capital

Barclays Capital

5,989

5,989

5,989

8

16.3

8

8

16.3

16.3

3

Dubai

3

3

Dubai

Dubai

Islamic

Islamic

Islamic

Bank

Bank

Bank

5,207

5,207

5,207

10

14.1

10

10

14.1

14.1

4

Deutsche Bank

4

4

Deutsche Bank

Deutsche Bank

2,655

2,655

2,655

8

7.2

8

8

7.2

7.2

5

JP Morgan

5

5

JP Morgan

JP Morgan

2,183

2,183

2,183

4

5.9

4

4

5.9

5.9

th

Source: Bloomberg, 15

Source: Bloomberg, 15

Oct, 2008

State of Qatar Sukuk – 2003

  • Best Sovereign Deal Middle East and Africa Euroweek

Government of Malaysia – 2002

  • Best Asian Sovereign Bond Euromoney

  • Deal of the YearInstitutional Investor

  • Most Innovative Capital Markets Transaction FinanceAsia

  • Most Innovative Bond Deal FinanceAsia

Malayan Banking Berhad (Maybank) – 2007

  • Best Sukuk Deal Euromoney 2008

  • Malaysia Deal of the Year Islamic Finance News 2007

US$600m

Government of Malaysia

Sole Bookrunner

US$600m Sukuk

Islamic Republic of Pakistan

Joint Bookrunner

US$300m Sukuk

Malayan Banking Berhard

JLM & Bookrunner

US$750m Sukuk

Khazanah Nasional Berhard

Joint Bookrunner

BN$500m Sukuk

Government of Brunei

Sole Advisor

Ras Al Khaimah Investment Authority – 2007

  • Best Sovereign Deal Islamic Finance News 2007

2007

2006

August 2007

2003

2005

Khazanah Nasional Berhad Sukuk – 2006

  • Best Sukuk Deal Euromoney 2007

  • Sovereign Deal of the Year Islamic Finance News 2006

  • Malaysia Deal of the Year Islamic Finance News 2007

Gulf Finance House – 2007

  • Bahrain Deal of the Year Islamic Finance News 2007

Alaqaria Sukuk – 2007

  • Qatar Deal of the Year Islamic Finance News 2007

  • Qatar Deal of the Year The Banker 2008

SABIC Sukuk – 2006

  • Sukuk Deal of the Year Islamic Finance News 2006

  • Saudi Arabian Deal of the Year Islamic Finance News 2006

  • Most Innovative Capital Markets Transaction & Most Innovative Bond Deal Finance Asia

HSBC Amanah non-GCC Sukuk issues and notable awards

Excluding regional Malaysian Ringgit denominated issuances, HSBC Amanah continues to be the leader by every measure of Sukuk underwriting since 2002


Islamic finance and sukuk market review

Government of Malaysia, 2002

- First Islamic Sovereign Global Bond

State of Qatar, 2003

– First Islamic Sovereign Eurobond from the Middle East

The Islamic Republic of Pakistan, 2005

- First Global Islamic Bond Issue by the issuer

Government of Brunei, 2006

- First Capital Market Initiative in the Kingdom

Khazanah Exchangeable Sukuk, 2006

- First Shariah-compliant Exchangeable Bond

Tabreed, 2006

– First internationally rated GCC corporate Sukuk

Sharjah Islamic Bank, 2006

– First rated Commercial Bank Sukuk from Middle East

Maybank, 2007

– First ever Subordinated Tier 2 Sukuk

Qatar Real Estate Inv. Co., 2007

- First rated Sukuk for a Qatari corporate

Department of Civil Aviation, Dubai, 2004

– Largest Islamic Sovereign Global Bond

Leading the way in innovative transactions

HSBC has set the standard in the Islamic finance space, executing a wide range of “firsts” in the market


Islamic finance and sukuk market review

Selected Sukuk Deal Summaries


Islamic finance and sukuk market review

Saudi Binladin Group – SAR 1bn Sukuk

Transaction overview

On 1 September 2008, Purple Island Corporation launched a 5-year SAR1,004 million Sukuk guaranteed by Saudi Binladin Group (“SBG”)

The deal was a successful issuance despite being unrated and issued during the slow summer period

HSBC is the sole manager / bookrunner for this offering

Breakdown by geography

Issuer:Purple Island Corporation (SPV registered in the BVI and owned by certain members of the Binladin Group owners

Rating:Not rated

Guarantor:SBG

Maturity:1 September 2013

Issue Amount:SAR 1,004 million (equivalent USD200 million)

Profit:7% fixed

Listing:Riyadh

Sole Manager/

Bookrunner:HSBC

Transaction highlights

Breakdown by investors

  • The Sukuk Mudaraba was SBG’s debut Sukuk issuance into the Saudi debt capital markets

  • The transaction opened up to new investor base for SBG

  • First ever: unrated Sukuk of its size to be successfully distributed entirely within the Kingdom; Sukuk issued through an offshore vehicle which is registered, cleared and settled through Tadawul (also a first for the Kingdom); and Sukuk relating to Makkah developments

  • The Sukuk will enhance Saudi Binladin’s position in this sector and complete one of the first boutique hotels in Makkah


Islamic finance and sukuk market review

SABIC – SAR 5bn Sukuk al-Istithmar

On 26 May 2008, SABIC issued a SAR 5 billion Sukuk, targeted at Saudi and GCC investors

This is the first rated Sukuk in the Kingdom, and rated level to issuer rating. It was also the first public Sukuk in Saudi Arabia to allow investors to subscribe with as little as a minimum of SAR10,000

Notwithstanding continuing market volatility and tightening liquidity, the issue attracted substantial demand, resulting in an order book of more than 50 accounts nearly 1.3x the ceiling established by the Saudi regulator

Transaction overview

Breakdown by geography

Issuer:Saudi Basic Industries Corporation (“SABIC”)

Rating:A+ [S&P]

Issue Date: 26 May 2008

Maturity:15 May 2028 (first Put: 15 May 2013)

Issue Amount:SAR 5 billion (equivalent USD1.3 billion)

Profit:3m SAR Sibor + 48 bps

Listing:London and Dubai

Joint Lead ManagerHSBC

Joint Bookrunner:HSBC

Transaction highlights

Breakdown by investors

  • This transaction further consolidates HSBC’s position as the number one lead manager of Saudi Arabian Sukuk issuance. HSBC has again demonstrated its dominance in the Saudi capital market by Lead Managing, Structuring and Bookbuilding the fourth Saudi Arabian Sukuk – SABIC’s third Sukuk issuance in less than two years

  • HSBC’s input and assistance allowed the Sukuk to become the first in Saudi Arabia to be rated at the time of issuance

  • After opening up the SAR Sukuk market in 2006, HSBC has led ALL SAR public Sukuk issuances, aggregating SAR 21bn in size

  • Final distribution again achieved investor diversification, with banks comprising only 32% of the issue. Retail investors comprised more that half of the total in terms of number, and HSBC attracted new/first-time investors


Islamic finance and sukuk market review

RAKIA – US$325m Investment Sukuk

On 26 November 2007, Ras Al Khaimah Investment Authority (“RAKIA”) priced and launched a 5 year US$325m Sukuk

The deal was a successful US$ denominated issuance during a volatile market conditions

HSBC was a joint lead manager/bookrunner for this offering

The transaction reinforces HSBC’s leading position in Islamic capital markets and also HSBC’s position as the number one lead manager of Middle East bond issuance

Transaction overview

Breakdown by geography

Issuer:RAKIA Sukuk Company Limited

Obligor:The Ras Al Khaimah Investment Authority

Rating:Unrated

Guarantor:Government of Ras Al Khaimah

Maturity:5 December 2012

Issue Amount:US$325

Profit:3m US$ Libor + 150 bps

Listing:London and Dubai

Joint Lead ManagerHSBC

Joint Bookrunner:HSBC

Transaction highlights

Breakdown by investors

  • The deal was successfully closed despite difficult and volatile market conditions. At the time of closing, another transaction in the market for a Dubai government linked entity was aborted due to poor demand from investors

  • The transaction was over-subscribed beyond the issue size of US$325m with 27 accounts participating in the issue

  • Final distribution achieved investor diversification, with banks comprising 53% of the issue while corporates, private banks and fund managers made up the remaining 47%

  • HSBC played a crucial role in the successful closing of the transaction by generating almost two-thirds of the order book


Islamic finance and sukuk market review

SABIC – SAR8bn Sukuk al-Istithmar

On 6 August 2007, SABIC issued a SAR 8bn Sukuk, targeted at Saudi and GCC investors. HSBC was a joint lead manager/bookrunner and sole regional coordinator for this landmark offering

This is the largest-ever Sukuk/bond issued by a Saudi entity and the largest non-equity linked Sukuk in the region by a publicly quoted corporate, beating the recent record set by Saudi Electricity Company (sole led by HSBC)

Transaction overview

Breakdown by geography

Issuer:Saudi Basic Industries Corporation (“Sabic”)

Rating:Not rated

Maturity:15 July 2027 (first Put: 15 July 2012)

Issue Amount:SAR 8bn (US$2.1bn)

Coupon:3m SAR SIBOR + 38 bps

Joint Lead Manager:HSBC

Sole Regional Coordinator:HSBC

Transaction highlights

Breakdown by investors

  • Despite external market volatility and mid-way increase in issuance ceiling, an orderbook of SAR 10bn in size was built up, allowing the company to issue at the revised ceiling of SAR 8bn. Half the allocated orders in number went to retail investors

  • Final distribution achieved investor diversification, with bank comprising only 40% of the issue. Retail investors comprised half the total in terms of number, and HSBC attracted new/first-time investors

  • HSBC is the only house to have Sukuk approved by a Saudi Shariah Committee (SABB Amanah Shariah Committee). The transaction firmly reinforces HSBC’s position as the leading Sukuk/DCM house and emphasizes its leadership in the Kingdom’s capital market


Islamic finance and sukuk market review

QREIC – US$300m 5 year Sukuk

On 27 July 2007, Qatar Real Estate Investment Co (“Alaqaria”) priced and launched a US$300m 5 year Sukuk issue

This is the first rated Sukuk for a Qatari corporate

HSBC acted as Sole Lead Manager and Bookrunner for the issue

Transaction overview

Breakdown by geography

Issuer:Qatar Alaqaria Sukuk Company

Obligor:Qatar Real Estate Investment Co. Q.S.C.

Obligor Ratings:A2 (Moodys) / BBB+ (Fitch)

Issuer Ratings:A2 (Moodys) / BBB+ (Fitch)

Maturity:2 August 2012

Issue Amount:US$300m

Profit:3m US$ Libor + 73 bps

Listing:London

Lead ManagerHSBC

Bookrunner:HSBC

Transaction highlights

Breakdown by investors

  • This is the first rated Sukuk for a Qatari corporate

  • The deal was priced at US$3m L + 73 bps, the tighter end of the initial price guidance of “75bps area” in a volatile market environment.

  • HSBC Financing Solutions Group successfully acted as the ratings advisor in this exercise as well as advising on structuring the Sukuk to receive the same ratings as the Company

  • The transaction reinforces the Group’s leading position in Islamic Capital and highlights the seamless and successful co-operation between Investment Banking, Amanah, Debt Capital Markets and the Financing Solutions Group teams in providing integrated value-added proposition to Alaqaria


Islamic finance and sukuk market review

Saudi Electricity Company – SAR 5bn Sukuk al-Istithmar

On 23 July 2007, Saudi Electricity Company (“SEC”) issued its debut SAR 5bn (US$1.3bn) Sukuk

This is the largest-ever Sukuk or bond issued from Saudi Arabia and the largest non-equity linked Sukuk in the region by a publicly quoted corporate

Although purely a domestic transaction, the issue attracted substantial demand with a final order book of SAR 7bn from 33 accounts, nearly 3 times SEC’s issuance target

Transaction overview

Breakdown by geography(issue is restricted to Saudi nationals and entities only)

Issuer:Saudi Electricity Company (“SEC”)

Rating:Not rated

Issue Date:23 July 2007

Maturity:15 July 2027 (first Put: 15 July 2012)

Issue Amount:SAR5bn (US$1.3bn)

Profit:3m SAR Sibor + 45 bps

Sole Boookrunner:HSBC

Sole Lead Manager:HSBC

Transaction highlights

Breakdown by investors

  • This transaction represents the largest Sukuk or bond issuance (domestic or international) by a Saudi Arabian issuer

  • Final distribution achieved SEC’s goal of investor diversification, with banks comprising about 50% of the issue

  • The issuance highlights the Group’s ability to harness domestic SAR liquidity, even during turbulent external market conditions

  • The success of this issuance reinforces the Group’s position as the leading Sukuk and bond house and its leadership in the Kingdom’s debt markets


Islamic finance and sukuk market review

Maybank – US$300m Subordinated Tier 2 Sukuk

On 18 April 2007, Malayan Banking Berhad (“Maybank”) successfully priced a landmark US$300m Subordinated Lower Tier 2 Sukuk

The transaction represents the world’s first ever subordinated bank capital Sukuk and showcases HSBC’s continued leadership in innovation in the Islamic capital markets

HSBC acted as Joint Lead Manager and Joint Bookrunner on this prestigious transaction

Transaction overview

Breakdown by geography

Issuer:MBB Sukuk Inc.

Obligor:Malayan Banking Berhad

Obligor Ratings:A3 / A- / A-

Issue Ratings:Baa1 / BBB+ / BBB+

Pricing / Settlement Date:18 / 25 April 2007

Maturity / Call Date:25 April 2017 / 2012

Re-offer Spread:6m US$ Libor + 33 bps

Listing:Singapore and Labuan

Joint Lead Manager & Bookrunner:HSBC

Transaction highlights

Breakdown by investors

  • HSBC was able to leverage off Maybank’s many credit strengths to price at 6m US$ Libor + 33 bps, the tight end of initial guidance (of 35 bps +/- 2 bps). This represented the tightest ever pricing in US Dollars for a Malaysian borrower and also the tightest ever USD Sukuk pricing globally (excluding supranational borrowers)

  • Combined with an aggressive but transparent pricing strategy, the transaction attracted almost US$2.4bn of orders, an oversubscription of over 7x

  • Strong interest in the transaction was seen from both Islamic and conventional investors, with over 70 accounts in the book. Every Islamic order brought into the book was done so by HSBC on a sole basis


Islamic finance and sukuk market review

ADIB – US$5bn Trust Certificate Programme

On 30 November 2006, ADIB priced and launched its debut debt capital market issue; US$800million 5 year Sukuk issue under the programme

This is the first rated Trust Certificate Programme by a commercial bank and the largest in size among all trust certificate programmes

This transaction reinforces HSBC’s leading position as an arranger of Islamic EMTN issuance – HSBC was the arranger of the only other Shariah-compliant EMTN Programme in 2005

Transaction overview

Breakdown by geography

Issuer:ADIB Sukuk Company Ltd

Obligor:Abu Dhabi Islamic Bank PJSC (“ADIB”)

Rating:A2 (Moody’s) / A (Fitch)

First Issue Date:12 December 2006

Maturity Date: 12 December 2011

Issue Amount:US$800m

Coupon:3m US$ Libor + 40 bps

Lead Manager:HSBC

Sole Arranger/Bookrunner:HSBC

Transaction highlights

Breakdown by investors

  • The transaction was 2 times oversubscribed (total order book being close to US$1bn) beyond the initial target issue size of US$500m, with 47 accounts participating in the issue

  • The issue was upsized to US$800m after the high allocation demand from the participating accounts. Non-Middle Eastern investors accounts for 50% of the order book, which is the highest ever achieved by a commercial bank Sukuk issue

  • The transaction highlights the seamless and successful co-operation between CIBM Amanah, Debt Capital Markets and the Ratings and Capital Advisory teams and reinforces the Group’s leading position in the Islamic Capital Markets


Islamic finance and sukuk market review

Khazanah – US$750m Exchangeable Islamic Bonds

On 27 September 2006, Khazanah successfully issued US$750m of Shariah compliant Islamic bonds which are exchangeable into shares of Telekom Malaysia

This transaction marks:

– The first-ever Shariah compliant exchangeable bond transaction

– The largest equity-linked issue ever out of Malaysia

– The largest equity-linked issue in Asia ex-Japan since January 2005

Transaction overview

Breakdown by geography

x

No. of accounts

Issuer:Rafflesia Capital Limited

Obligor:Khazanah Nasional Berhad

Underlying shares:Telekom Malaysia (“TM”)

Base issue size:US$650m

Greenshoe:US$100m or 15.4% of base issue size

Tenor: 5 Years

Periodic payment: 1.25% per annum payable annually

Yield:5.07%

Exchange premium:19%

Redemption amount:121.14%

Reference share price:MYR9.1143 (VWAP on pricing date)

Exchange price:MYR10.85

Issuer’s call option:After 3 years subject to 130%

Listing:HKSE and Labuan

HSBC role:Joint Bookrunner and Joint Lead Manager

Transaction highlights

Breakdown by investors

  • The offering was upsized from an initial size of US$500m to US$750m after overwhelming demand from international investors during the first two days of bookbuilding

  • A well devised marketing strategy was implemented to educate Middle Eastern investors on the innovative exchangeable bond structure and conventional investors on the Islamic aspects of the structure

  • The book was over-subscribed by about 6 times the initial issue size with high quality demand from dedicated CB specialists, Middle Eastern Islamic and conventional investors and some fixed income funds

  • HSBC played a key role in assisting Khazanah achieve its key objective of maximizing demand from the Middle East by generating over 50% of the demand from the region

  • Demand was well diversified with the Middle East comprising 29% of allocations, Europe 41%, Asia 26% and offshore US accounts taking 4%


Islamic finance and sukuk market review

SABIC – SAR3bn Sukuk Istithmar

On 29 July 2006, SABIC issued a SAR 3bn (US$ 800m) Islamic bond (Sukuk Al-Istithmar). HSBC was sole bookrunner and lead manager for this debut transaction

This is the first corporate Sukuk/bond in Saudi Arabia and the first public bond issuance in Saudi Arabia; it is also the largest in the region by a publicly quoted corporate

It is also the first tradable Sukuk/bond in the Kingdom and the first to be cleared through the Saudi Stock Exchange

Transaction overview

Breakdown by geography

Issuer:Saudi Basic Industries Corporation (“Sabic”)

Rating:Not rated

Issue Date:29 July 2006

Tenor:5 years

Issue Amount:SAR 3bn (US$800m)

Coupon:3m SAR SIBOR + 40 bps

Sole Bookrunner:HSBC

Transaction highlights

Breakdown by investors

  • The Sukuk structure utilised an existing business as the underlying assets and is the first one where the company itself is the issuer rather than an SPV

  • While purely a domestic transaction, the issue attracted substantial demand with a final order of over SAR 4.3 billion, allowing issuance at the maximum approved size (SAR 3 billion). Final distribution achieved Sabic’s objective in diversifying its investor base and will act as a catalyst to the Kingdom’s debt capital market

  • This landmark transaction firmly highlights HSBC’s debt credentials in Saudi Arabia and reinforces HSBC’s position as the number one lead manager of Middle East Bond issuance


Islamic finance and sukuk market review

Tabreed – US$200m 5 year Sukuk

On Monday 10th July, Tabreed priced and launched a 5-year US$200 million Sukuk via Tabreed 06 Financing Corporation

The offering represents the first internationally rated corporate Sukuk globally and the underlying Istisna-Ijara structure is the first of its kind. It offers an innovative solution to issuers lacking assets to achieve benchmark sized Shariah-compliant financing

Transaction overview

Breakdown by geography

Issuer:Tabreed 06 Financing Corporation

Obligor:National Central Cooling Company (PJSC) (“Tabreed”)

Rating:BBB- (S&P)

Issue Date:20 July 2006

Maturity Date: 20 July 2011

Issue Amount:US$200m

Coupon:6m US$ Libor + 125 bps

Joint Bookrunner:HSBC

Global Coordinator:HSBC

Transaction highlights

Breakdown by investors

  • In addition to being the first investment grade corporate Sukuk globally, the offering is also the first unsupported (by a sovereign guarantee, explicit or implicit) corporate rating in the GCC region

  • A total order size of US$285m was achieved; however the Issuer opted to limit the total amount of the offering to US$200m

  • Following the allocation process, 75.5% of the Sukuk were placed in the Middle East, 13.8%Asia and 9.7% Europe


Islamic finance and sukuk market review

Islamic Republic of Pakistan - US$600m 5 year Sukuk

Breakdown by geography

Transaction rationale

Issuer: The Islamic Republic of Pakistan

Rating: B+

Issue Date: 27 January 2005

Maturity Date: 27 January 2010

Issue Amount: US$ 600 million

Coupon: 6m US$ Libor + 220 bps

Reoffer Spread: 6m US$ Libor + 220 bps

Joint Bookrunner:HSBC

On Tuesday 18th January 2005, HSBC acted as Joint Lead Manager and Bookrunner on the Islamic Republic of Pakistan’s US$600m Sukuk Floating Rate Trust Certificates issue

The highly successful transaction is the debut Sukuk offering from Pakistan and represents the first international Sukuk issue by a non investment grade obligor

Breakdown by investor type

Transaction highlights

  • As a result of substantial investor appetite the issue was upsized to US$600m from an initially anticipated US$500m

  • With 82 investors participating in the offering, the issue achieved widespread geographical distribution and account diversification

  • The Sukuk structure diversified Pakistan’s investor profile to include Islamic investors whist simultaneously embracing conventional bond accounts

  • Of the total order book, 48% of orders were given jointly to Citigroup & HSBC, while a further 45% of the book comprised of orders obtained by HSBC exclusively


Islamic finance and sukuk market review

IDB – US$500m 5 year Sukuk

On Wednesday 15th June, Islamic Development Bank priced and launched the inaugural Sukuk issue under its US$1bn EMTN Programme

The transaction has a maturity of 5 years and was priced at Libor +12 bps

With this issue, IDB has effectively re-positioned its credit in the market and created a strong benchmark for future issuance

Transaction overview

Breakdown by geography

Issuer:IDB Trust Services Ltd.

Obligor:The Islamic Development Bank

Rating:AAA (S&P) / AA (Fitch)

Issue Date:15 June 2005

Maturity Date: 22 June 2010

Issue Amount:US$500m

Coupon:6m US$ Libor + 12 bps

Joint Bookrunner:HSBC

Transaction highlights

Breakdown by investors

  • The Sukuk successfully achieved IDB’s objective of investor diversification: final allocations saw two-thirds of the deal placed outside the Middle East

  • The final order book exceeded US$700m and contained 29 orders, including ticket sizes up to US$100m

  • The quality of the order book was clearly demonstrated by strong participation from central banks – Approximately a third of the deal was allocated to these investors

  • Pricing and launch followed a road show that visited centres in Asia, Europe and the Middle East


Islamic finance and sukuk market review

The Government of Dubai – US$1bn 5 year Sukuk

On Thursday 28th October the Government of Dubai, acting through Department of Civil Aviation (DCA), issued a US$1bn Islamic bond issue (Sukuk al-ljara). HSBC was joint bookrunner and lead manager

Due to over-subscription and a final order book over US$1.2bn, the deal was increased in size from an initial US$750m

This transaction consolidates HSBC’s position as the number one lead manager of Middle East sukuk issuance

Transaction overview

Breakdown by geography

Issuer:The Government of Dubai, acting through DCA

Rating:Unrated

Issue Date:28 October 2004

Maturity Date: 4 November 2009

Issue Amount:US$1bn

Coupon:6m US$ Libor + 45 bps

Reoffer Spread:6m US$ Libor + 45 bps

Joint Bookrunner:HSBC

Transaction highlights

Breakdown by investors

  • The purpose of the financing is for the expansion and development of Dubai International Airport, reflecting Dubai’s fast growing status as a major regional and global hub

  • The deal achieved a diversified book by investor type with around 70% of the deal placed among non-Islamic investors. Investor types included central banks, banks, supranationals, corporates, insurance and pension companies and private banks

  • This is Government of Dubai’s debut international sukuk issue - in 2003 HSBC lead managed an AED 1.5 billion domestic bond issue

  • Although the pre-marketing roadshow only visited the GCC region, the deal still achieved 16% placement outside the Middle East


Islamic finance and sukuk market review

State of Qatar – US$700m 7 year Sukuk

The State of Qatar’s issuance was only the second time that a sovereign has issued internationally rated and listed Islamic securities, and it was the first time that a Sukuk al-Ijara had been issued from the GCC under the Regulation S format

The final order book closed more than twice subscribed at US$1.2bn. The deal was increased from US$500m to US$700m, the largest ever international Islamic financing, restricted by the underlying asset that is valued at approximately US$700m

Transaction overview

Breakdown by geography

Issuer:State of Qatar

Rating:A+

Issue Date:30 September 2003

Maturity Date: 9 October 2010

Issue Amount:US$700m

Coupon:6M US$ Libor + 40 bps

Sole Bookrunner:HSBC

Transaction highlights

Breakdown by investors

  • Having announced initial price guidance in a range of +38-43 bps, the deal was priced at 40 bps over Libor. This was despite Qatar’s fixed rate US$ bond due 2009 trading at Libor +55 bps at the time of pricing. The appeal of the Sukuk / FRN product, together with the rarity value of new Qatar sovereign issuance, enabled strong book-building at the lower margin

  • Qatar achieved its objective of broadening its investor base as new investors accounted for about two-thirds of the allocated orders and around three-quarters of the issue amount

  • Qatar maintained a balanced distribution between liquidity-orientated and buy-and-hold investors and an equal split between Islamic and conventional accounts. This ensures sufficient secondary market liquidity for the notes, as Middle East investors are typically reluctant to trade


Islamic finance and sukuk market review

Federation of Malaysia – US$600m 5 year Sukuk

Most Innovative Bond Issue of the Year

– THE ASSET

Most Innovative Capital Markets Transaction of the Year

– FINANCEASIA

Best Asian Sovereign Bond

– EUROMONEY

Most Innovative Bond Deal of the Year

– FINANCEASIA

Sovereign Bond of the Year

– ASIAMONEY

Deal of the Year

– INSTITUTIONAL INVESTOR

Transaction overview

Breakdown by geography

Issuer:Federation of Malaysia

Rating:BBB/Baa2

Issue Date:3 July 2002

Maturity Date: 3 July 2007

Issue Amount:US$600m

Coupon:6 month US$ Libor plus 95 bps

Sole Bookrunner:HSBC

Transaction highlights

Breakdown by investors

  • The deal was priced on 25 June late evening at US$ Libor +95bp – At the tightest end of the price talk range

  • The order book closed more than 2 times oversubscribed at US$1.1bn

  • An equal split between Islamic and conventional accounts to ensure sufficient secondary market liquidity for the Sukuk

  • First sovereign Islamic bond issue to be rated by international rating agencies (Moody’s & S&P) and to be listed on the Luxembourg Stock Exchange. First Islamic bond to be distributed under Reg. S and Rule 144A

  • Initial price guidance on 20 June: At US$ Libor + 95bp area. Interest from Asia alone grew to over US$600 million. The momentum enabled Malaysia to tighten price guidance to a range within 92 - 95 bps


Islamic finance and sukuk market review

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