Islamic Bond Issue Hints at Future Opportunities

Knowledge of Islamic, or "sukuk," bonds can help a banker win deal business even from global corporate issuers based outside the Muslim world.

Along with the rapid rise of sovereign wealth funds, the sukuk market further illustrates how growing Mideast wealth is influencing the services and structure of Western financial institutions. For bankers, the ability to meet these clients' unique needs and preferences represents an emerging career niche.

An unidentified multinational company is set to issue Islamic bonds within a $5 billion medium-term note program, Bloomberg News reported Wednesday. A capital markets executive at Morgan Stanley, which is underwriting the sale, called it a "landmark" that will encourage other global companies to tap the sukuk market.

Sukuk bonds employ a combination of leasing, repurchase agreements and equity to simulate conventional bond returns without using interest, which is forbidden in Islamic law. They are purchased by banks and fund managers serving Muslim clients in the Middle East and elsewhere.

Bloomberg says global sukuk sales jumped 70 percent last year to a record $30.8 billion. The issuers are mainly Arab and Southeast Asian governments and Mideast-based corporations such as Qatar Real Estate Investment Co. and DP World.

The latest deal is unique in that the issuer is a "multinational," which Morgan Stanley characterizes as companies with global operations that have a "household name.''

The issuing company has links to the Middle East and is "looking to diversify sources of funding,'' Yavar Moini, Morgan Stanley's executive director of global capital markets in Dubai, told Bloomberg. "It's not about arbitrage but about tapping new liquidity,'' he said, since sukuk costs about the same as issuing conventional bonds.