Foreign firms warm to sukuk

More foreign companies will use Islamic bonds known as sukuk to raise money this year, a top banking official says.

Dubai, January 16, 2011 - Buildings under construction at the Fountain Views, an Emaar project in downtown Dubai January 16, 2010. (Jeff Topping/The National) STOCK
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Islamic bonds are growing increasingly popular with foreign companies doing business in the region, the leader of Citigroup's regional operation says.

Sukuk are being considered as a way to diversify financing portfolios and sometimes to hedge risks, said Alberto Verme, the chief executive of Citigroup's Europe, Middle East and Africa operations.

"You need to have diversified funding sources so you are never surprised by market volatility and you have access to every window," Mr Verme said.

He said he expected a jump in sukuk activity in the next two years, "from the local community, but equally from foreigners".

Sales of sukuk are expected to rise 60 per cent this year from last year to US$22 billion (Dh80.8bn), according to a survey of the financial community released last month by Thomson Reuters.

Last year sales fell 26 per cent compared with 2009 to $14bn after several high-profile companies in the region restructured their debts or defaulted.

Sharia-compliant bonds are based on the revenue flow from assets, not interest, and experts say they can offer advantages for foreign companies over conventional bonds.

Apart from attractive cost structures that are often competitive with conventional bonds, they offer issuers a new range of buyers focused on Sharia-compliant debt.

"There is a natural pool of demand for sukuk that is probably under-utilised," said Michael Grifferty, the president of the Gulf Bond and Sukuk Association, which is based in Dubai.

Mr Grifferty said that after a year of challenges, he expected sukuk to "re-emerge as a popular financial tool", partly because of interest from foreign companies.

Qatar Islamic Bank is already experiencing an increase in interest, said Ahmad Meshari, the bank's acting chief executive.

"The capital market is there so everyone is working on it," Mr Meshari said. Sukuks were considered "longer term and more stable".

"With the upcoming projects I think there will be a demand for such a mode of finance," Mr Meshari said.

The finance arm of General Electric (GE), General Electric Capital, issued a $500 million sukuk in November 2009, the first US corporation to do so, Mr Verme noted.

"For GE and others that are long-term investors in the region, the sukuk is an avenue we would recommend," he said.

"We are promoting sukuks among multinationals because we think it makes sense. You need to compare the costs to what you could get in the regular capital markets and other sources you might have."

Although interest waned after the Gulf region's problems last year, in recent months Citi has "seen a great, great interest from the investor side of the equation", Mr Verme said.

Sukuk activity has already picked up this year.

Last month the Dubai developer Emaar announced plans to raise up to $2bn in Islamic bonds, its first use of sukuk in six years.

The developer Nakheel is also planning a sukuk issuance, to help pay creditors.

But there are still questions about Sharia-compliant debt. Last month the UK government shelved plans to issue what would have been the first sale of Islamic bonds by a western federal government.

In announcing the decision to cancel the sale, a spokesman for the UK treasury said the bonds did not to provide "value for money".