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Market Anticipation as UK Inches Towards Second Sovereign Sukuk Issuance as Tender for Syndication Banking Services closes in January 2020

Cagamas Berhad, the National: The UK inched closer towards issuing its second sovereign Sukuk in January 2020 when the UK Debt Management Office (DMO) of HM Treasury issued an invitation to tender for Sukuk syndication banking services. The tender notice simply stated: “This Invitation to Tender relates to the procurement of syndication banking services for the United Kingdom’s sovereign Sukuk issue, through an open and competitive process.”

The above tender deadline passed on 28 January 2020 and the contract start date fell on 10 February 2020. These dates are revealing because, with the contract end date falling on 30 April 2020, it is likely that any foray into the market by the DMO will be imminently after that, this side of FH 2020, depending ultimately of course on the right market conditions and whether the Sukuk is “value for money for the UK taxpayer” and whether it satisfies HM Treasury’s own impact assessment for bonds and now for Sukuk.

With the UK exiting the EU on 31 January 2020, the irony of the UK Sukuk Issuance Proposition could not be lost on the sudden resignation of the Chancellor of the Exchequer Sajid Javid on 13 February 2020. Mr Javid, in his capacity as Chief Secretary to the Treasury, then Business Secretary and until recently the Chancellor of the Exchequer has been a strong supporter of the UK Islamic finance proposition.

The strength of the UK’s Islamic finance policy is underlined by a supportive cross-party approach in the House of Commons which ensures continuity in the event of a change of prime minister or government party in office or indeed a chancellor of the exchequer. As such the impact of Brexit or the departure of Mr Javid on UK sovereign Sukuk issuance is almost non-existent. The new Chancellor, Rishi Sunak, an ex-Goldman Sachs banker, is promoted from Chief Secretary to the Treasury, where he worked closely with his erstwhile boss.

In this respect there is an in-built continuity of UK plc policy towards Islamic finance and investment, which may take a more prominent nuance in a post-Brexit era as the country seeks to attract more investment, trade and financial partnerships especially from the wealthier Organisation of Islamic Cooperation (OIC) countries.

What the market is awaiting with abated breath is the size of the second UK Sukuk. Will it be a benchmark size or even larger?

The process for the second sovereign issuance started in earnest in 2019. In July John Glen, the Economic Secretary to HM Treasury & and City Minister, at the London Sukuk Summit in July 2019, announced that “the original 2014 UK Sovereign Sukuk matures in July 2019, having unlocked millions in sterling denominated liquid assets for Islamic banks. And it was so successful that we’re following it up with a second Sovereign Sukuk.”

In September 2019, the Crown Commercial Service, acting on behalf of HM Treasury, sent out a RFP simply stating: “We invite you to bid in this competition for the appointment of Structuring Bank(s) for the New UK Sovereign Sukuk.”

On 4 November 2020, the UK DMO, on behalf of HM Treasury, appointed HSBC and Clifford Chance LLP as structuring and legal advisors “to assist with the UK government’s second issue of sovereign Sukuk.” This latest invitation in January 2020 to tender for the for the appointment of syndicate banks to assist with the UK government’s second issue of sovereign Sukuk is the last in the process, before the issuance is taken to market for pricing and distribution.

The DMO in a clarification to questions posed by prospective bidders for the syndicate banks confirmed that “it will be acceptable to include AAA-rated supranational and quasi-sovereign Sukuk issuers; however, please clearly distinguish between sovereign and non-sovereign issuers in your response.”

As far as the documentation is concerned, the DMO stressed that “the appointed syndicate banks will receive the draft documents for their legal/Sharia’a review, although it is not anticipated that any substantive changes will be made to them at this stage. The Structuring Bank (HSBC) will also provide its Sharia’a pronouncement to the syndicate banks, in case that is useful in terms of their internal approval process.”

The proposed second UK sovereign Sukuk issuance, confirmed the DMO, will be on a standalone as opposed to a programme basis.

The invitation to tender is accompanied by a number of detailed explanatory documents and questionnaires for the prospective syndicate bank. The joint lead managers to the transaction are expected to include banks with deep and well-developed links to potential investors in one or both of the Middle East & North Africa (MENA) region and Southeast Asia; and banks that are leaders in the Shariah-compliant debt market.

The UK became the first Western country to issue a 5-Year Sukuk Ijarah in June 2014, raising £200 million in the process. The transaction paid a profit rate of 2.036% in line with the yield on gilts of similar maturity. The issuance was 10 times oversubscribed with the order book exceeding £2 billion. That debut Sukuk was arranged by a syndicate comprising Barwa Bank from Qatar, CIMB Islamic from Malaysia, HSBC, National Bank of Abu Dhabi (First Abu Dhabi Bank) and Standard Chartered Bank, thus covering all the major centres of global Islamic finance activity.

A second UK sovereign Sukuk will be a timely boost to the sector in the UK, particularly when seen together with the much-discussed launch of the Bank of England’s new Shariah-Compliant Facility (SCF), designed to enable Islamic banks to hold Bank of England reserves to meet their regulatory requirements for holdings of high-quality liquid assets in a way consistent with Islamic commercial law.

The UK, according to Mr Glen, is home to five fully Sharia’a-compliant banks, with assets totalling around US$5.5 billion in the first half of 2018. Beyond those five, a range of conventional UK banks offer Islamic finance products and services.

“The City of London has always been a beacon: drawing business, capital, and talent from around the world. It has shone even more brightly over the last few decades as we embraced the energy of Islamic finance. And that beacon will continue long into the future – not dimmed by Brexit but fuelled by Brexit – as we move towards a truly Global Britain. Our commitment to equal treatment for all has helped attract investment, while our legal and regulatory systems have been emulated across the world. Companies are also flocking here because Britain is the home for Islamic finance expertise in the West. There are over 200 international law firms, at least 25 of which have dedicated Islamic finance units. And we have the world’s highest number of institutions offering Islamic finance courses: more than the likes of Malaysia and Singapore,” he concluded in a recent speech.

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