Al Rayan Bank prints UK Sukuk first

Published: February 21, 2018

Al Rayan Bank hit a number of firsts in February to become the only bank outside of a Muslim majority country to print a public Sukuk backed by residential mortgages, and the bank’s treasurer tells EMEA Finance that the deal will hopefully encourage other Islamic banks to tap the market.  

The UK’s largest Islamic bank by assets printed the £250mn residential mortgage backed security (RMBS) Sukuk – the largest ever Sukuk of any type printed in sterling – with a three year weighted average life. The proceeds will be used to finance growth to its asset books, which has increased by more than 23% over the last 12 months.

“When we were considering our options,” said Amir Firadus, Al Rayan Bank’s treasurer, “this was the least complicated. We were considering covered bonds and private placements, but other UK challenger banks had issued RMBS.”

The RMBS, named Tolkein Funding Sukuk No.1 by the Birmingham based lender in honour of the city’s famous Lord of the Rings creator, is secured against a portfolio of prime UK, owner occupied, home purchase plans (HPP) originated by Al Rayan.

The securitisation of the residential assets has been provisionally rated Aaa by Moody’s and AAA by Standard & Poor’s.

Al Rayan Bank ran the transaction alongside Standard Chartered. 


Newcomer’s premium
The borrower printed the Sukuk at Libor plus 80bp. This includes a number of premiums over where a regular RBMS transaction from an established borrower would likely come to the market. 

Firadus reckons that the premium attached to being a debut issuer was 20bp, while an additional Sukuk premium was also at that area. 

This gives fair value of roughly 85bp to 90bp, according to Firadus’ calculations, putting the deal slightly below fair value on 1.55 times demand. Buy to let RMBS, an imperfect comparable as it is not Islamic finance but still one of the few data points that exist, have been printing recently at just over Libor plus 75bp area.

However, as Al Rayan Bank is a debut issuer in a debut asset, it did not have any clear cut comparables, making fair value guesswork by necessity. 

The notes had tightened slightly in the grey market soon after pricing and were trading at around 76bp to 78bp in the days following the transaction.

UK names were big buyers of the debt, which was a purposeful strategy, according to Firadus.

“97% went to UK investors,” said Firadus, “that was the split we were aiming for because while traditional Islamic finance investors would understand the Sukuk, they would not immediately understand the RMBS structure.”


Sukuk showdown
Getting such a high number of UK accounts on board was no small feat. Islamic finance’s international reputation has had a tough time recently with the UAE’s Dana Gas heading to the English High Court in a high-profile tussle with investors over the legitimacy of US$700mn of Shariah complaint bonds. {mprestriction ids=“*”}

Dana Gas tried to argue that as the bonds were no longer considered Shariah-complaint by scholars, it did not have to repay its investors. The English High Court found in investors’ favour in November 2017, but it still left a sour taste in some mouths.

“Dana Gas was the name that was mentioned on the roadshow and we explained to investors that we are working in the UK legal jurisdiction,” said Firadus, “which allays the fears of commercial investors.”

The UK has sought to make itself a home for Islamic finance after the state printed a £200mn Sukuk in 2014. 

However, Firadus said that this Sukuk was not brought up much by investors. This is perhaps a validation of the objections raised at the time - that the UK’s foray into Islamic finance at a sovereign level was little more than a publicity stunt rather than a meaningful excursion into Shariah-compliant debt.

The reason the UK sovereign Sukuk was not considered by investors when looking at Al Rayan Bank’s is that its secondary activity is low, meaning it does not reflect current market conditions.

“The UK government Sukuk was well accepted worldwide but liquidity is lower than you would expect,” said Firadus. 

However, with the UK hosting so many firsts from the Al Rayan Bank RMBS Sukuk, the country has become a focus once again as a potential western hub for Islamic finance.

“The issuance of this ground breaking Sukuk is a major landmark in the history of Al Rayan Bank, but it is also a significant development for the global Islamic finance sector which reinforces the UK’s position as a global hub for Islamic banking,” said Sultan Choudhury, chief executive of Al Rayan Bank.

Furthermore, it could have wider ranging implications of introducing traditional Islamic issuers to consider the RMBS market.

“Hopefully this deal will benefit other Islamic banks and inspire them to tap the RMBS market, especially in the Middle East and South East Asia,” said Firadus. “Australian banks have been active in RMBS listings recently and there is plenty of demand for it.”

Al Rayan Bank is looking to return to the capital markets late next year. {/mprestriction}