Cross-Border Sukuk Issues
David Testa, Executive Director
Head of Islamic Finance, WestLB
London Sukuk Summit
Royal Horseguards Hotel, 21 June 2007
WestLB and Islamic Finance
Expansion & Innovation
Two Case Studies
Stimulants for Continued Growth
WestLB – Islamic Finance Highlights
USD 210,000,000
Sukuk
USD 1,000,000,000
Ijara Syndicate
USD 850,000,000
Islamic Finance
USD 500,000,000
Commodity Murabaha
USD 150,000,000
Musharaka Trust Sukuk
Joint Mandated Arranger
& Joint Bookrunner
Joint Mandated Arranger
Joint Mandated Arranger
Joint Mandated Arranger
Sole Underwriter
& Bookrunner
October 2005
January 2006
March 2006
April 2006
September 2006
USD 100,000,000
Musharaka Trust Sukuk
USD 31,000,000
True Murabaha
USD 300,000,000
Syndicated Standby Morabaha
USD 600,000,000
Dar Al-Arkan
USD 1.1bn
Commodity Murabaha
Facility
£225m
Commodity Murabaha
Facility
Joint Mandated Arranger
Sole Mandated Arranger
& Sole Bookrunner
Joint Mandated Arranger
& Joint Bookrunner
Joint Lead Manager
& Joint Bookrunner
Joint Mandated Arranger
& Joint Bookrunner
Sole Mandated Arranger
& Bookrunner
September 2006
December 2006
December 2006
March 2007
April 2007
May 2007
 WestLB has arranged and underwritten:
 over 15 Islamic financings since the beginning of 2005
 principal aggregate amount of over US$6.0bn
*Source: Dealogic Loanware, no. of facilities
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 3
Sukuk Summit
London
21 June 2007
Expansion and Innovation
 Important Market: New but fast growing niche in the global capital markets:
 Growing at approximately 10-15% per annum
 S&P estimate the market to be approximately US$400bn, with a potential of US$4 trillion (report Oct 2006)
 Islamic finance markets: strong growth over the last 2-3 years:
 total volumes just over US$8bn in 2004
 over US$28bn in 2006
 over half the volume in 2004 originated from Malaysia, but the balance has shifted, with financings in the GCC accounting
for some US$15bn of the 2006 total
 BUT – still a “niche within a niche”:
 Over US$2 trillion of conventional bonds and short-term note issuance in 2006
 Total GCC syndicated loan volumes for 2006 reached over US$65bn
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 4
Sukuk Summit
London
21 June 2007
Expansion & Innovation
 A new product - the first GCC sovereign Sukuk issued in 2001
 Rapid growth
 2005 volume of issuance: 55 issues in 2005 raising US$9.6bn*
 2006 volume of issuance: 66 issues raising US$17.0bn*
 2007: 40 issues totalling US$33.8bn announced*
 Volumes in GCC increasing:
 2005: 11 issues raising US$2.3bn*
 2006: 17 issues raising US$6.4bn*
 2007: US$50bn commonly forecast*
* Source: IFIS
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 5
Sukuk Summit
London
21 June 2007
Expansion & Innovation
Sukuk Statistics Q2 2007; by Country
Up to 10th June 2007
Country
Total issued in USD$ (Million)
No. of Issues
4,945.90
6
600.00
1
5,858.17
35
Kuwait
200.00
1
Pakistan
16.48
1
Bahrain
101.00
7
11,721.55
51
United Arab Emirates
Saudi Arabia
Malaysia
Sum Total of all Countries
Source: IFIS (Islamic Finance Information Service)
GCC Total: US$5,846.9m (15 issues representing 49.9% of total issuance)
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 6
Sukuk Summit
London
21 June 2007
Expansion & Innovation
 Convertible issues
 Dubai Ports Authority: US$3.5bn Musharaka Sukuk
 Nakheel: US$3.52bn Pre-IPO Sukuk (including look-back rights)
 Exchangeable issues
 Aabar Petroleum US$460m Sukuk issue  Mudarabah structure
 Aldar Properties US$2.53bn Sukuk issue  Mudarabah structure
 Put and Call Options
 SABIC US$8000m 20 year Sukuk issue with 5 year put
 The Investment Dar US$150m Musharaka Sukuk due 2011
 Put and call options at the end of year 3
 Co-ownership structure
 Sharjah Islamic Bank US$225m Sukuk Certificates due 2011
 Co-ownership structure utilising assets in SIB’s Islamic portfolio
 MTN Programmes
 Sa’ad Group US$5bn programme
 Others soon to follow…
 Securitisation
 First significant issues awaited…
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 7
Sukuk Summit
London
21 June 2007
Expansion & Innovation: Wide Appeal of Sukuk Issues
 Sukuk issues consistently appeal to both Islamic and conventional investors:
Issue
Launch Spread
Bookrunners’ Comments
Dubai Civil Aviation
US$ 1bn, 5 yr Sukuk,
(Dec 2004)
45bp
“27% distribution outside of the Middle East”
“Islamic money represented slightly in excess of 30% of the book”
IDB Trust Services,
US$ 500mn
(June 2005)
14.3bp
“more than 90% of the accounts … were conventional buyers”
“Asia 35%, Europe 26%, the Middle East 32%”
“Banks took 43%, central banks 23%, corporates 12%, agencies
10%, insurance 2%”
Sharjah Islamic Bank
US$225m
(October 2006)
65bp
“the first rated Sukuk by a bank”
“25 accounts participated…with Middle Eastern investors taking 58% of the paper, Europeans 34% and
Asian investors 8%”
“Banks bought 84% of the deal and funds 16%”
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 8
Sukuk Summit
London
21 June 2007
Source: DEALOGIC Bondware
Expansion & Innovation: Secondary Market
Sukuk secondary market activity – still very limited:




Over 100 Sukuk issues listed on Bloomberg (SUKU) –only a small minority are priced
Very few secondary trades
Primary market still to gain critical mass
Islamic investors on a “learning curve” too
Source: SUKU pages Bloomberg
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 9
Sukuk Summit
London
21 June 2007
Expansion and Innovation
 Global spread: Islamic finance is spreading beyond the GCC and South-East Asia:
 Germany August 2004: Anhalt-Saxony €100m Sukuk
 Kazakhstan March 2005: US$50m commodity murabaha for Bank TuranAlem
 Turkey October and December 2005: US$50m commodity murabaha for TSKB and US$44m “true” murabaha for FFK Fon
Leasing**
 USA June 2006: US$165m Sukuk for East Cameron Partners (Texas)
 Japan August 2006: JBIC US$300-500m Sukuk issue announced and still “under investigation”
 China September 2006: US$250m Sukuk announced to finance a Chinese power project
 UK April 2007: Government to review feasibility of Sukuk issue
 UK May 2007: £225m Islamic LBO for Aston Martin acquisition from Ford Motor Company by The Investment Dar and
consortium**
** Sole arranger: WestLB
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 10
Sukuk Summit
London
21 June 2007
Islamic Finance – Focus on the UK
 UK initiatives:
 Labour Government:
 "long-term ambition to make Britain the gateway to Islamic finance and trade“
 Aiming to make the City of London one of the world‘s leading centres for Islamic finance
 Retail focus in the UK: "Islam is Britain's second-largest faith, and Muslims are involved in every walk of British life“
 Islamic Bank of Britain
 Wholesale Islamic banking in the UK: "Islam is Britain's second-largest faith, and Muslims are involved in every walk of British life“
 European Islamic Investment Bank
 Bank of London and the Middle East
 Further licence applications with the FSA
 Legislation to facilitate the offering of Islamic finance products in the UK:
 “Alternative financing arrangements”
 Initial retail focus
 Finance Act 2005: ijara structures extended to commercial property
 Finance Act 2006: wakala and diminishing musharaka
 Finance Bill 2007 for Sukuk issues to be treated for tax purposes as conventional issues
 UK Sovereign Sukuk Issue: feasibility study announced in April 2007
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 11
Sukuk Summit
London
21 June 2007
“The name’s Bond….Islamic Bond”
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 12
Sukuk Summit
London
21 June 2007
Aston Martin: first fully Sharia-compliant LBO in the UK
 WestLB is Mandated Lead Arranger,
Underwriter and Bookrunner
 Joint Mandated Lead Arrangers:
•
Bahrain Islamic Bank
•
EIIB
•
Standard Bank
 £225m Islamic facilities:

£200m term

£25m revolver
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 13
Sukuk Summit
London
21 June 2007
Aston Martin - Day 1: Commodity Murabaha Structure
Aston Martin transaction:
Participants
MLA, Underwriter and Bookrunner: WestLB
1. Participations
Murabaha Agreement between Bidco and WestLB
as Investment Agent
3. Spot payment
Investment
Agent
(WestLB)
Metals
Supplier
2. Metals
Two tranche structure:
 £200m term facility
 £25m revolving facility
7. Deferred
payment
4. Metals
8 year final maturity, 5 year put option
5. Metals
Metals
Buyer
Bidco
6. Spot payment
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 14
Mudaraba Agreement between WestLB and the
syndicate banks
Sukuk Summit
London
21 June 2007
Profit rate 3 or 6 month LIBOR + 295bp
Aston Martin - long-term structure: Musharaka
WORK IN PROGRESS
Participants
Purchase
Undertaking
1. £
Aston Martin Lagonda
Lease
Agreement
Asset Pool
Investment Agent
2. £
1.
Facility commitments
2.
AML identifies Asset Pool to contribute to
Musharaka
3.
Purchase price for interest in Asset Pool
4.
IA and AML co-own assets
5.
Balance of cash to Musharaka to apply to
the co-owned assets
6.
Co-owned assets transferred to Musharaka
7.
IA leases its interest in its proportion of the
co-owned assets back to AML
8.
Purchase undertaking – exerciseable on
event of default
9.
AML appointed as manager of Musharaka
Co-ownership interests
Co- owned Assets
3. £
Musharaka JV
(managed by Aston Martin Lagonda)
Management Agreement
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 15
Sukuk Summit
London
21 June 2007
Saudi Arabia - First Off-Shore Sukuk
Issuer
DAAR International Sukuk Company (a limited liability company incorporated in the Cayman
Islands)
Guarantor
Dar Al-Arkan Real Estate Development Company (DAAR)
Issue
US$600,000,000 Trust Certificates due 2010
Maturity
3 years, bullet
Floating Rate
3-month US$ LIBOR
Coupon
US$ LIBOR plus 200bp
Issue Type
Sukuk al-Ijara
Joint Lead Managers and Joint
Bookruners
ABC Islamic Bank (E.C.); Arab National Bank; Standard Bank Plc; Unicorn Investment Bank, B.S.C. (c);
and WestLB AG, London Branch
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 16
Sukuk Summit
London
21 June 2007
Dar Al Arkan US$600m Sukuk Al Ijara
Offshore
SUKUK HOLDERS
Issue
Proceeds
(US$)
On-shore
Certificates
Lease Payments
3 Year Lease
ISSUER
DAAR
(DAAR International Sukuk Co.)
Guarantee
Payment for
Real Estate
Rights (US$)
Transfer of
Real Estate
Rights
Sale
Proceeds
(US$)
SAUDI SPV
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 17
Sukuk Summit
London
21 June 2007
Sale of Real
Estate
Assets
Stimulants for Continued Growth
 Expansion of Islamic banking system – eg, in the GCC and UK
 GCC funding needs
 Infrastructure requirements/real estate
 Corporate “Islamicisation”: listed companies and family companies
 Europe
 Event-driven financing
 Continued FDI
 Asia: widening interest following Malaysia’s lead (Singapore, Japan, Indonesia, Thailand)
 Developing harmonisation/standardisation
 Central Bank of Bahrain
 AAOIFI
 Islamic Financial Services Board
 Gaps in the market
 Islamic Sukuk/Mudarabah funds
 Securitisation
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 18
Sukuk Summit
London
21 June 2007
WestLB Contacts
Islamic Finance – Origination & Structuring
David McCaig
Head of Emerging Markets
Managing Director
David Testa
Head of Islamic Finance
Executive Director
Walid Sarieddine
Director
Sami Neffati
Manager
WestLB AG
London Branch
Cross-Border Sukuk
David Testa
Page 19
Telephone
Fax
e-mail
(+44) 20 7020 7532
(+44) 20 7020 7530
david_mccaig@westlb.co.uk
Telephone
Fax
e-mail
Mobile
(+44) 20 7020 3622
(+44) 20 7020 7530
david_testa@westlb.co.uk
(+44) 7770 435 312
Telephone
Fax
e-mail
Mobile
(+ 44) 20 7020 7533
(+ 44) 20 7020 7530
walid_sarieddine@westlb.co.uk
(+44) 7769 670 660
Telephone
Fax
e-mail
Mobile
(+ 44) 20 7020 7523
(+ 44) 20 7020 7530
sami_neffati@westlb.co.uk
(+44) 7825 420 765
Sukuk Summit
London
21 June 2007