Acid Test In $500m Sukuk Offering

Judging by the oversubscription of Bahrain's latest local currency Sukuk offerings, market demand is steadily returning to pre-early 2008 levels as pricing and yields become more competitive and attractive. Bahrain, together with Malaysia, continues to be the most prolific issuer of sovereign Islamic securities whether they are local currency or international issuances.

The acid test will come with the imminent issuance of Manama's international $500 million sovereign Sukuk offering. But judging by the ongoing recovery in the global Sukuk market, the signs are that the latest Ministry of Finance sovereign Sukuk managed by the Central Bank of Bahrain (CBB) will similarly be oversubscribed. Bankers and asset managers at the recent World Islamic Capital Markets Conference in Manama were upbeat about prospects for the Sukuk market in general and GCC (Gulf Cooperation Council) sovereign issuances in particular.

Abdul Rahman Al-Baker, executive director of Financial Institutions Supervision at the CBB, confirmed at the above conference that the CBB would issue its third international Sukuk soon, which will be listed on the London Stock Exchange.

"The CBB, having pioneered the development of Sukuk," he added, "remains active in the sovereign Sukuk market with a total of $1.69 billion medium- to long-term Sukuk issued to date, complemented by a regular program of short-term issuance. It is the CBB's hope that such initiatives will go a long way in harmonizing market practices and creating a deep and vibrant Islamic capital market.

"Generally, the potential size of the Islamic finance market is vast, and the accelerated establishment of Islamic finance hinges on attracting the flow of these potential funds into Islamic investment. However, it is important to ensure that the Islamic investment industry has a solid foundation for future development and growth."

At the end of May 2009, the CBB issued its regular monthly short-term Sukuk Al-Ijara (leasing securities). The 5 million Bahraini dinars issuance, which carries a maturity of 182 days, was oversubscribed by 200 percent and the issuer, which is the CBB on behalf of the government of Bahrain, had to close the order book at 10 million Bahraini dinars. The expected return on the issue is 1.30 percent. The CBB's monthly issue of 6 million Bahraini dinars worth of Sukuk Al-Salam certificates — the 97th issuance in the series — on June 1 was similarly oversubscribed by 205 percent with subscription orders topping 12.3 million dinars. The issuance has a maturity of 91 days. The expected return on the issue, which began on June 3 and matures on Sept. 2, is 1.00 percent. The issuance partly serves as a short-term liquidity management option for Islamic financial institutions in Bahrain. Bahrain recently consolidated its regulatory framework for collective investment undertakings (CIUs) aimed at providing a full range of investment funds to various categories of investors, from retail to high net worth individuals and institutional investors. The framework specifically introduced first-ever rules allowing funds to be set up for sophisticated investment schemes like leveraged buyout investment, alternative instruments and distressed assets investment.

"The new CIU rules provide a solid foundation for the establishment and management of (a variety of) funds that comply with Islamic principles," said Al-Baker.

Already the market is seeing a number of Sukuk funds being or about to be launched to take advantage of the rapidly improving and attractive international Sukuk market conditions. Bahrain-based Tharawat Investment House, for instance, is awaiting final approval from the CBB to launch the $100 million Tharawat Sukuk Fund. The fund will invest in Sukuk offerings mainly in the GCC countries and offer investors either cash distributions or through additional units. Minimum subscription to the fund is $100,000.

According to Tharawat Investment, the fund will pursue an absolute return (total return) strategy with initial targeted profits of 2 percent above 3 months US dollar LIBOR per month.

The Bahrain mutual funds industry is one of the fastest growing segments of the overall financial sector in the island state. With over $11 billion in assets under management, through more than 2,600 funds, the industry has been growing at an annual average of about 20 percent in recent years. According to the CBB, of the 2,600 funds, there are 98 Islamic funds incorporated and registered in Bahrain with total assets of $1.8 billion at of the end of 2008.