September 2, 2014
U.K.

Islamic debt seen funding U.K. wind farms to rail tracks

By Lyubov Pronina | BloombergBusinessweek | September 01, 2014 | www.businessweek.com

Islamic debt could become a source of funding for wind turbines and high-speed trains as Britain cements its position as the first sukuk market in a non-Muslim nation.

Investors including DAR Capital see scope for the U.K. to issue Shariah-compliant bonds with varying maturities after the Debt Management Office attracted bids for more than 10 times the 200 million pounds ($331 million) of securities offered at its debut sale through banks in June.

Prime Minister David Cameron has pushed for sukuk sales to help establish London as a global capital for Islamic finance alongside Dubai and Kuala Lumpur, and tap into an industry that PricewaterhouseCoopers LLP estimates will increase to $2.6 trillion by 2017. There is investor appetite for more sales that could help fund almost 400 billion pounds of planned infrastructure projects, said Mansur Mannan, executive director of DAR Capital.

“The government could help the U.K. industry as well as the Islamic industry further by trying to develop the yield curve and go for much longer-dated paper by underwriting some of the infrastructure-development projects that they have in mind,” London-based Mannan said in an Aug. 19 phone interview. A yield curve is a chart showing rates on bonds of different maturities.

The U.K. sold the Shariah-compliant notes maturing in July 2019 at a profit rate of 2.036 percent. That rate was 1.73 percent as of 4:30 p.m. London time yesterday. The yield on similar-maturity U.K. government bonds fell 28 basis points, or 0.28 percentage point, over the period to 1.72 percent.

Britain has weighed the sale of sukuk since 2007, when it ordered a study into the possibility of issuing the securities. Supporters include Roger Gifford, a former Lord Mayor of London, who said last year that Islamic finance should be as British as “fish and chips.”

The government will review its sukuk sale and consider how it can further develop its strategy for Islamic finance, Sarah Ellis, spokeswoman for the debt office, said by e-mail on Aug. 14. It does not have any current plans to sell further sukuk, she added.

The Treasury described the sale as a “huge success” and reiterated its “broader strategy” to promote the Islamic finance industry in the U.K. The sale of bonds in June will “demonstrate to potential corporate issuers of sukuk that the concept of issuing sukuk works,” it said in an Aug. 29 e-mail.

“For the U.K. to have an established sukuk market, there would need to be a benchmark issue in excess of 500 million pounds and a regular program of additional sukuk transactions of varying maturities,” Humphrey Percy, chief executive officer of the Bank of London and the Middle East, wrote in an Aug. 27 e-mail. The U.K. would benefit from “filling out the other parts of the medium-term curve – three, seven and 10 years,” he said.

The U.K. government envisages 377 billion pounds of infrastructure projects in the coming years, with most of it financed privately or part-privately. Major projects include a high-speed railway link between London and Birmingham, airport developments and the construction of wind turbines.

BLME was among banks and sovereign-wealth funds that bought the securities. Many bidders held onto their allocations, London-based Percy said.

Borrowing costs are falling. Average global sukuk returns declined 64 basis points this year to 2.78 percent, according to a Deutsche Bank AG index. They reached a one-year low of 2.78 percent in May, below the five-year average of 3.42 percent. Emerging-market sovereign yields fell 79 basis points in the period to 5.09 percent, JPMorgan Chase & Co. indexes show.

First-time sales of bonds that adhere to Islam’s ban on interest are set for a revival from the worst quarter in more than four years, with Luxembourg, Hong Kong and South Africa seeking to promote initial sales this month.

Issues of Islamic bonds have fallen 82 percent to $2.6 billion so far this quarter compared with the previous three months, headed for their lowest level since the period ended March 2010, according to data compiled by Bloomberg.

Global-sovereign sukuk sales will rise to $30 billion this year, according to Christian de Guzman, vice president and senior analyst at Moody’s Investors Service in Singapore.

CIMB Group Holdings Bhd., based in Kuala Lumpur, predicts shariah-compliant bond sales may top last year’s $43.1 billion and challenge the record $46.5 billion sold in the previous 12 months as an increasing number of non-Muslim countries tap the market.

While investors hope the U.K. government will sell further sukuk, the incentive is now with the private sector to develop opportunities for the use of Islamic finance products, said Wayne Evans, senior adviser at TheCityUK, a U.K. lobby group.

“We understand that some U.K. corporates are already considering options available and discussions with potential investors are taking place,” Evans said in an Aug. 26 e-mail.