BOND, ISLAMIC BOND

Sharjah 2015 | FINANCE | FOCUS: SUKUK

In recent years, both Sharjah's government and the Sharjah Islamic Bank have entered international debt markets and issued Islamic bonds, so called sukuk, to raise capital.

Sukuk, which in Arabic means financial certificates, are bonds that are compliant with Islamic law and as such do not bear any interest. While there is a wide range of sukuk, the most common sukuk are the Al Ijara variant, and it is the Al Ijara sukuk that the government of Sharjah chose for its debut entry to the international debt markets in September 2014 when, after years of hard work, the government issued a 10-year, $750 million sukuk with a fixed profit rate of 3.764%, becoming the first sovereign to issue a 10-year sukuk as a debut debt capital markets transaction.

A testament to the strong demand from international investors for bonds from the UAE, the sukuk was over-subscribed by more than ten times, growing the size of the order book to $7.8 billion, with investors from the Middle East taking up 50% of the geographic distribution, while 20% was allocated to the United Kingdom, 11% to the rest of Europe, 14% to Asia, and 5% to other, non-specified parts of the world. The global coordinator assisting the government was HSBC, while Sharjah Islamic Bank, National Bank of Abu Dhabi, Kuwait Finance House, and Standard Chartered acted as joint lead managers, and Dubai Islamic Bank, Al Hilal Bank, and Arab Banking Corporation as co-lead managers.

Reflecting on the sukuk, which is part of wider program to reduce borrowing costs that has produced savings for the government of over AED125 million ($34.04 million) per year, HE Sheikh Mohammed bin Saud Sultan Al Qasimi, Chairman of Sharjah Finance Department, described it as “a major landmark in the financial and economic development of the Emirate of Sharjah," and he praised the Finance Department for “meeting all of the objectives, but more importantly, showing the best face of the Emirate to a global audience of investors."

Long before the government, Sharjah Islamic Bank issued its first sukuk and the premier sukuk in Sharjah in 2006. Since then, the Bank has issued three more, launching its most recent $500 million five-year sukuk in March of 2015, which was oversubscribed by seven times and thus had a book size of $3.6 billion. Listed on the Nasdaq Dubai and well diversified between investors from the Middle East, Europe, and Asia, the sukuk was arranged by Abu Dhabi Islamic Bank, Al Hilal Bank, Dubai Islamic Bank, Emirates NBD, HSBC, KFH Investment, Noor Bank, and Standard Chartered. With pricing set at 110 basis points over five-year midswaps, and a profit rate of 2.843%, Ahmed Saad Ibrahim, Deputy CEO, attributes the success of the issuance to the Bank's high profile on the international market, as well as “the growth of overall financial ratios of the Bank."

As Moody's expects global sukuk issuance to remain resilient and gain increased momentum in 2015, Sharjah'sfinancial institutions could very well issue additional sukuk, especially given the tremendous success that the previous sukuk have had. In light of this, HE Sheikh Mohammed bin Saud Sultan Al Qasimi notes that the Department “has already received inquiries for a new sukuk" but is quick to point out that this will not happen anytime soon from the government's side. The banks, however, might be significantly more inclined to enter the debt markets again, as international investors continue to express great interest in bonds from the UAE.