Mudaraba-murabaha structure could lower liquidity premium

04 April 2012
During March, Saudi dairy and poultry firm Almarai issued the first series of its SAR 3.2 billion (USD 853 million) sukuk program for SAR 1 billion, which used a mudaraba-murabaha structure.  According to Zawya's sukuk database, there have only been 22 issues using this structure, mostly by two companies -- LBS Bina Group and KNM Capital -- in Malaysia. 

The use of this structure in the GCC has been driven by HSBC's Saudi Arabian unit, which advised on SABB's Tier II subordinated sukuk also issued in March, and the sukuk issued by the Islamic Bank Aljazira in the first quarter of 2011. 

The structure of the mudaraba-murabaha sukuk for Almarai is split between a mudaraba contribution invested in the group assets of Almarai, co-invested alongside the company's investment.  The remainder is split into a murabaha financing for the company with one half advanced on the sukuk issuance and the remainder advanced at a later date.  As long as 25% of the sukuk is made up of mudaraba assets, the sukuk is tradable.  It will be listed on Tadawul's Bond & Stock Exchange. 

The yield on the sukuk has not yet been announced, but was 4.7 times oversubscribed.  The base prospectus leaves flexibility about maturity and whether the coupon payments will be fixed or floating.  The first issuance will mature in seven years. 

A research report from Audi Saradar Investment Bank released on March 5 anticipated issuance in March of SAR 1.5 billion split into SAR 1 billion of five to seven years maturity and the remaining SAR 500 million with maturity of six months.  Audi Saradar expected that SAR 800 million of the proceeds would be used to refinance existing debt with the rest invested in the company's capital expenditure programs. 

The Saudi sukuk market has been developing slowly, although the issuance of a massive sovereign sukuk issued by the General Authority for Civil Aviation (GACA) for SAR 15 billion could spur other issuance.  The USD 4 billion issuance was larger than total issuance by Saudi corporates in either 2010 (USD 3 billion) or 2011 (USD 2.8 billion). 

The mudaraba-murabaha structure may appeal to many issuers because it allows issuers to access the market with tradable sukuk where a portion of the financing is murabaha. 

The rules around trading of debt, which are more strictly applied in the GCC than in Malaysia where bay' al-dayn is permitted, entered the headlines with the backlash against Goldman Sachs' proposed murabaha sukuk.   One of the criticisms of that issuance is that it is to be listed on the Irish Stock Exchange (reportedly for regulatory benefit), although the prospectus says it can be traded only at par.  The ISE--quite naturally--has said it would not restrict trading to only occur at par.

The mudaraba-murabaha structure could serve as a way to bridge the gap by allowing issuers to lower the liquidity premium it would likely have to pay for a non-tradable sukuk, while still receiving up to 75% of the proceeds through murabaha.  If the mudaraba-murabaha structure gains wider acceptance, it is likely that the share of the proceeds from murabaha will drop, just as it has in issuance of istithmaar sukuk where earlier sukuk were tradable with up to two thirds of the assets being debt-based but more recent issues have adopted a more conservative 51% threshold.

Blake Goud is the founder of Sharing Risk, a think tank on Islamic finance based in Portland, Oregon.  He writes the Sharing Risk blog and also covers the Americas for The Islamic Globe. Blake is also the chief compliance officer for Marquam Capital, a registered investment advisor, and chief compliance officer for HP Securities, a FINRA-member broker/dealer.  The views expressed in this article are his own.

© Zawya 2012

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