Dubai Private Equity Invests in Europe With First Sukuk: Islamic Finance
Millennium Private Equity Ltd., a Dubai government-linked investment company with about $5 billion in capital, plans to use Islamic financing for venture capital in Europe after buying the first corporate sukuk in the U.K.
Millennium, part-owned by Dubai Islamic Bank PJSC, the United Arab Emirates’ largest Shariah-compliant bank, bought $10 million of four-year convertible notes in July that were sold by International Innovative Technologies Ltd., a clean energy company in Gateshead.
“We are looking at transactions in Europe and other areas,” Vally Khamisani, a director at Millennium said in an interview in Dubai yesterday. “They can tap into capital which is focused on Shariah principles. The structures can fly well here.”
Persian Gulf investors are exploring opportunities outside the region, taking advantage of tightened lending in Europe to diversify. Middle East and North Africa private equity funds have about $10 billion available to invest after raising a record $5.4 billion in 2008, Gulf Venture Capital Association said in a July 20 statement.
European companies may turn to the Middle East, which has more than 400,000 millionaires, Cap Gemini SA and Bank of America Corp.’s Merrill Lynch unit said in a world wealth report in June. Their combined wealth grew 5.1 percent in 2009 to $1.5 trillion, the report said.
International Innovative sold sukuk due in 2014 that pay an annual return of 10 percent in a private placement, said George Ord, the managing director of the maker of industrial milling machines in northeast England. The bonds will be converted to an equity stake in the coming weeks, he said in an interview from Gateshead yesterday, declining to disclose the size.
“We wouldn’t hesitate to go back into the market,” Executive Chairman Thomas Wilkinson said yesterday. “Our funding streams at the moment are fine, so we have no immediate need to go back into the market. If we want to do further expansion, that may change.”
Policies to promote assets that follow Islamic law, such as easing of taxation and the sale of government sukuk, are spreading to Europe from Asia. The German state of Saxony-Anhalt became the first European borrower to sell bonds adhering to Islamic law in August 2004 with 100 million euros ($128 million) of five-year sukuk, according to data compiled by Bloomberg. Luxembourg is considering selling Islamic bonds, central bank Governor Yves Mersch said in Bahrain in May.
‘A Lot of Inquiries’
Sales of Islamic bonds, which are based on the exchange of asset flows rather than interest, may reach about $30 billion this year as the global economy recovers and nations build infrastructure, Kuwait Finance House KSC, the nation’s biggest Islamic bank, said Aug. 22. Global sales of sukuk fell 12 percent to $10.3 billion so far in 2010, according to data compiled by Bloomberg.
“We have had a lot of inquires coming in from European corporates across sectors, from energy to utility, to telecommunication companies,” said Mohammed Dawood, the Dubai- based director of debt capital markets at HSBC Holdings Plc, the second-largest underwriter of Islamic bonds. “They’re looking at ways to diversify funding. Islamic bonds may be an option.”
Middle East and North Africa private equity investments declined to $561 million last year from $2.72 billion in 2008, hit by the global credit crisis, according to Manama, Bahrain- based Gulf Venture Capital. Sales of Islamic bonds from borrowers in Europe are unlikely to take off, according to UBS AG, Switzerland’s largest bank.
“You may see selectively some lower-rated borrowers issuing in Islamic format, but it’s going to depend on the credit profile and name recognition of the borrower,” London- based James Sadler, a director for Middle East and Africa debt capital markets at UBS, said in a phone interview on Aug. 31. “The possibilities are there, but this is likely to remain a niche funding platform for that type of borrower.”
Millennium, established in 2006 and co-owned by Bahrain’s United Gulf Bank BSC, wants to buy stakes in European companies specializing in energy, telecommunications and media, Khamisani said. Millennium helped structure International Innovative’s sukuk, the fund’s first deal in Europe, he said.
The private equity company invested in U.S.-based Turin Networks Inc., a provider of telecommunications products, in 2008, and acquired a strategic stake in Friendi mobile, a cellular operator in the Middle East that year.
The spread between the average yield for global sukuk and the London interbank offered rate narrowed 5 basis points to 380 on Sept. 1, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. It has narrowed 87 basis points this year.
The yield on the Dubai Department of Finance’s 6.396 percent sukuk due in November 2014 was little changed at 6.8 percent today, according to Bloomberg data. The difference over similar-maturity U.S. Treasuries has widened 157 basis points to 563 since the debt was sold in October.
International Innovative’s sale is a “good omen because it means that there is some acceptance for Islamic system,” Naeem Ishaque, senior manager of the international division at Abu Dhabi Islamic Bank PJSC, the U.A.E.’s second-biggest bank complying with Shariah-banking rules, said in a phone interview from Abu Dhabi on Aug. 31. “This will encourage companies in the U.K. and Europe to issue sukuk.”
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