Goldman Sachs Said to Hire Banks for Debut Islamic Bond Sale

Goldman Sachs Group Inc. is planning its first foray into Islamic capital markets three years after starting a sukuk program that it never used.

Five banks including the New York-based lender will manage the dollar-denominated offering via JANY Sukuk Co., four people with knowledge of the deal said. A benchmark-sized sale may follow, they said, asking not to be identified as the plan is private. Goldman Sachs in 2011 created a $2 billion program that faced criticism from some Islamic advisers for not ensuring debt would be traded at par value, as required by Shariah.

Goldman Sachs is joining a growing number of issuers seeking to tap demand among Muslim investors in an industry that Ernst & Young LLP forecasts will double in the five years through 2018 to $3.4 trillion. The U.K. became the first non-Muslim country to issue Islamic bonds in June with a sale that lured bids for more than 10 times the amount offered. Luxembourg and Hong Kong are also planning investor meetings for similar offerings.

“There’s so much pent up demand in the sukuk space,” Thomas Christie, the Dubai-based head of fixed income at Prometheus Capital Finance Ltd., said by phone. “Given the controversy in the past, it would be interesting to see what structure they’re going to use, how they’re going to use the funds and how the Islamic community reacts to it.”

Previous Attempt

The planned security will take the form of Sukuk al Wakala, a Shariah-compliant structure in which one party entrusts another to act on its behalf. Standard & Poor’s rated the issue A-, the seventh-highest investment grade, the company said in an e-mail today.

The lender established a sukuk program three years ago based on a so-called commodity murabaha structure, or a cost plus mark-up transaction, that was approved for listing on the Irish Stock Exchange by the Central Bank of Ireland. Murabaha certificates can only be bought and sold at par value because they represent a future claim on the underlying assets.

The program, blessed by eight of the world’s top Islamic scholars, became entangled in a debate on whether it met Shariah-compliant guidelines and over lack of clarity on how Goldman Sachs planned to use the funds it raised.

Pent-Up Demand

Goldman Sachs will hold investor meetings in the Middle East on Sept. 10 and 11 and a so-called Regulation S transaction, which exempts overseas offerings from registration requirements under the SEC Securities Act of 1933, may follow, the people said. A benchmark-sized sale usually raises at least $500 million.

The notes would “probably price tighter” than Goldman Sachs’ conventional bonds due to the “pent-up demand in the sukuk space,” Christie of Prometheus said. The average yield on debt that complies with Muslim tenets dropped 63 basis points this year to 2.78 percent yesterday, the lowest since May, according to the Deutsche Bank Sukuk Bond Index.

Islamic lenders will have 70 million customers by 2018, up from 38 million last year, according to Ernst & Young forecasts. Shariah-compliant banking assets will double in that period, according to the advisory company.

South Africa, Bangladesh

South Africa last month picked banks for its debut sale of Islamic notes, while Bangladesh and the Russian region of Tatarstan are planning inaugural sales. In addition to itself, Goldman Sachs hired Abu Dhabi Islamic Bank PJSC, National Bank of Abu Dhabi PJSC, Emirates NBD Capital Ltd. and NCB Capital to manage the offering, the people said today.

Demand for Islamic bonds is surging helped by ample liquidity at banks. Al Hilal Bank PJSC, an Islamic lender owned by the Abu Dhabi government, received about $5 billion in bids for its $500 million sale of perpetual sukuk in June.

“Clearly, this is a good time and the demand for sukuk is still there,” Apostolos Bantis, credit analyst at Commerzbank AG in Dubai, said by phone. “This does actually indicate that the asset class of sukuk is expanding and diversifying.”

JANY Sukuk will enter a murabaha agreement for 49 percent of the issued amount and a wakala agreement for the remaining 51 percent with J. Aron & Co., a Goldman Sachs subsidiary, according to S&P.

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