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Saturday, November 10, 2007

Update on the Spread of Sukuk in Islamic Financing

DOHA, Nov 4 - More borrowers are considering offering Islamic bond sales in the United States, traditionally overlooked in roadshows, to gain better pricing for longer- term maturities, Barclays' head of Islamic finance said on Sunday.

To date, most Gulf sales of Islamic bonds, called sukuk, have been convertible into shares, which tend to be more expensive for the borrower, to attract investment in what were relatively young, unrated companies.

But as more companies gain ratings and a longer financial track record, they may be more attractive to U.S. investors, enabling them to sell cheaper non-convertible sukuk by diversifying their investor base.

"Given the size of the financing requirements and issuers wanting longer terms you need to expand your investor base," Barclays Capital's Arul Kandasamy told Reuters on the sidelines of an Islamic finance conference in Qatar.

"You now have issuers from the Middle East that are attractive to U.S. investors ... If you want big-sized, straight long tenure sukuk, then you want to target the United States, which has the deepest pool of funds," he added.

Kandasamy declined to outline what proportion of Barclays' sukuk pipeline would be sold in the United States, saying only that there was strong interest in doing so.

Dubai developer Nakheel's $3.52 billion sukuk sale in 2006 was the largest to date, and the bonds were later convertible into shares.

"Equity-linked sukuk were used for relatively new companies which may have found it difficult to target the straight debt market for large sized, unrated financing," Kandasamy said.

"A convertible has both equity and debt risk, and convertible investors are willing to take more risk, but equally want more returns in the equity option," he added.

Sukuk comply with Islam's ban on the receipt of interest, and returns derived from underlying physical assets are paid to bondholders instead.

The sukuk industry has surged on growing demand from the world's 1.2 billion Muslims, and by European and Asian institutions seeking more exposure to booming Gulf economies.

Kandasamy said there was now a growing awareness of Islamic finance in the United States.
Barclays arranged the sale of Dubai Ports World's $1.5 billion sukuk sale in June, which were also sold to U.S. investors. The bonds had a tenure of 10 years, relatively rare among sukuk of Gulf origin, which mostly have a tenure of five years.

Last month, Abu Dhabi National Energy Co sold $2 billion of conventional five- and 10-year bonds in the United States.

Both DP World's and Taqa's bonds were sold under the U.S. Securities and Exchange Commission's 144a rule, which governs private placements.

Selling under 144a is quicker and easier to arrange than public sales in the United States, which has relatively strict financial regulations compared to the Gulf, bankers say.


The Rest @ Yahoo Singapore

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