| DUBAI, March 29
DUBAI, March 29 Saudi Arabia is considering
whether to change the structure of its planned U.S. dollar sukuk
issue, which would be the kingdom's first international issue of
Islamic bonds, banking sources told Reuters on Wednesday.
Riyadh is expected to sell up to $10 billion of sukuk with
an issue that could take place in the next few weeks, bankers
say. It has been planning a hybrid structure for the sukuk.
The structure would comprise a mudaraba agreement, a form of
Islamic investment management partnership, plus a murabaha
facility that would trade commodities with a special purpose
But potential changes to that structure are now under
discussion to make the instrument more easily tradable and less
complex to understand for international investors, the sources
said. A spokesman for the Saudi finance ministry declined to
Some bankers who are not involved in the deal said they
believed the debate over the sukuk structure might be the reason
that Saudi Arabia had not already launched the issue, given the
current favourable market conditions with low credit spreads in
A hybrid mudaraba-murabaha structure is being used in a
private placement of riyal-denominated sukuk now being conducted
by Saudi Aramco, the national oil company.
But this structure may be too complex for some international
investors, possibly to the point of testing their appetite for
the issue, said one banker familiar with the debate, declining
to be named because the matter is private.
While Gulf investors and a sub-set of Western institutions
would probably be comfortable with a hybrid sukuk structure,
Riyadh might need to attract a wider investor base for an issue
approaching $10 billion, which would be the world's largest
dollar Islamic bond sale.
So the structure may be changed to an ijara format, a
lease-financing structure which is common among sovereign sukuk
issuance around the world and is better known internationally,
some bankers said.
An ijara sukuk, however, might require the transfer of some
assets pledged for the sukuk into a special purpose vehicle.
Shifting sovereign assets into an SPV could lead to legal and
regulatory hurdles, the bankers said.
The complexity of sukuk and investors' lack of familiarity
with them has long been recognised as barrier to growth of the
market. For that reason, two top standard-setting bodies in
Islamic finance have in the last few months proposed new
guidelines for sukuk, aiming to make them more transparent and
The new issue would be Saudi Arabia’s second international
bond sale after a $17.5 billion debut conventional bond issue
last October. That was the largest-ever emerging market debt
The kingdom started tapping international debt markets to
diversify its sources of finance and plug a huge budget deficit
caused by low oil prices.
Citi, HSBC and JP Morgan are global coordinators on the
planned issue. BNP Paribas and Deutsche Bank are also involved
with lead roles, and other banks might join the group of lead
managers, banking sources have said.
(Editing by Andrew Torchia/Jeremy Gaunt)