April 5, 2012 / 12:16 AM / 6 years ago

NAB in talks for potential Australian debut sukuk -IFR

SYDNEY, April 5 (IFR) - Australia is on the road towards establishing a local Islamic bond market although the country’s first sukuk issuance may be several months away, IFR, a Thomson Reuters publication, reported.

National Australia Bank (Aa2/AA-/AA-) is understood to be in talks with regulators on a potential debut Sharia-compliant bond offering as the issuer seeks to marry local regulations with such deals’ Islamic requirements.

Any sukuk must secure prior approval from Australian regulators, particularly the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC).

“Although no law changes are necessary for what is basically a repackaged product, APRA and ASIC need to be sure that the structures of any new asset class are sound, while the buy side will want to see strong government support for ultra ethical instruments,” stated one local fund manager.

APRA does not have existing guidelines specifically for Islamic bonds but it has had to deal with the introduction of Islamic banking products which must abide by Australia’s Banking Act.

APRA’s existing prudential regulations and guidelines would therefore need to be applied while ASIC’s disclosure and consumer protection rules must also be met. Any decisions would depend on individual cases.

This is likely to be an ongoing, time consuming exercise with the second half of 2012 seen as a ballpark time frame for Australia’s first Islamic bond transaction.

Both sides would welcome the diversity.

Assuming the economics works it makes sense for Australia’s major banks to tap the revived appetite for Islamic bonds as a means of diversifying investor bases in the face of their still substantial funding needs.

However, a local syndication manager questioned: “Why anyone would want to go through such a lot of work for relatively marginal business at a time when money is so freely available from traditional sources?”

He is also surprised that NAB appears to be leading the way given that ANZ and Commonwealth Bank of Australia are traditionally the most innovative of Australia’s four major banks as far as opening up new markets are concerned.

Furthermore ANZ has a large and expanding presence in Asia where a lot of sukuk demand emanates from, especially out of Malaysia and Indonesia.

Speculation that NAB will look to raise as much as US$500m from an inaugural offering looks to be on the high side for a debut instrument, according to DCM desks.

One banker suggested that around US$200m may represent a more reasonable target. The debut deal is likely to be in US dollars although it could include an Aussie dollar tranche and certainly be followed by Aussie dollar offerings, he added.

Such paper seems likely to attract interest from the usual purchasers of Australian bank paper while receiving additional “overwhelming demand” from cash-rich Middle East funds looking to invest a greater share of their money inside Asia.

“(The Middle East and North Africa) has obviously been very volatile in recent years, the European economy is moribund while the US political rhetoric against anything Islamic is clearly unhelpful. As a result it is no surprise to see Middle East funds looking to step up their Asian exposure with Australia offering an attractive window as a safe, transparent, Western democracy with great access to the region,” the banker noted. (Reporting by John Weavers at IFR; Editing by Jonathan Hopfner)

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