Mudarabah Deal of the Year
Dubai Islamic Bank (DIB) on the 20th January 2015 successfully raised US$1 billion in Shariah compliant Tier 1 certificates. Incorporating a Basel III-style point of non-viability clause, the issuance is a perpetual callable Sukuk, carrying a return of 6.75%, payable on a semi-annual basis. Speaking to Dr Adnan Chilwan, CEO of DIB, NABILAH ANNUAR examines the structure of this unique standalone capital raising instrument.
Structured under the Mudarabah contract, the Sukuk qualifies as a Tier 1 of the issuer under the current Basel II regulations and with the contingent non-viability clause, the Sukuk aims to comply with the Basel III guidelines as and when they are finalized in the UAE.
“Given the robust precedent of this structure, and given that the structure easily lends itself to a subordinated obligation of this kind, the Mudarabah structure was the right fit,” elucidated Adnan.
DIB first accessed the international Tier 1 markets in 2013. Following the success of this strategy and a growth in the bank’s assets, it was found that there would be a need for incremental capital. Adnan told IFN that due to market volatility, an anticipated rise in interest rates later in the year, and the potential onset of Basel III draft regulations which could restrict future issuances for a period of time in 2015, DIB’s management team decided to launch the Tier 1 issuance early in the year, and was able to successfully raise the funding it required at very efficient levels.
The main unique feature of this deal is that it aims to be ‘preemptive Basel III compliant’, pending the finalization of the Basel III rules in the UAE. The structure has a contingent contractual Point of Non-Viability (PONV) clause, which basically ‘switches-on’ the loss absorption at PONV if and to the extent required under the proposed regulations. The advantage to the issuer and the investor is that the loss absorption provision remains dormant if it is not required under the proposed guidelines (for Basel III compliance) and will only apply in future to the extent required by the regulator. Hence, the structure aims to meet the minimum regulatory guidance on the instrument currently and in the future. According to Adnan, investor feedback came from all parts of the emerging market RegS investor world, with MENA-based investors remaining as dominant drivers of the orderbook.
Amid an uncertain market backdrop that stemmed in the fourth quarter of 2014, DIB’s management team focused on the global roadshow and ensured its robust MENA investor base was kept engaged which in turn helped in driving the orderbook.
“It’s this strong regional base that formed the anchor for the orderbook which swelled to US$1.5 billion within the initial hours of initial price thoughts (IPTs) being announced on Tuesday, the 13th January 2015. In order to keep the critical private bank community engaged, we also ensured the inclusion of a 25% rebate which was very much in-line with market precedent for this kind of issuance. Once we saw the bulk of the international investors in the orderbook, and the resulting size of the book, we were confident enough to immediately go to final guidance which was 25bps inside the IPT and launch a US$1 billion transaction soon after at 6.75%,” added Adnan.
Summary of terms & conditions |
|
Issuer |
|
Obligor |
|
Issuance Price |
100% |
Purpose of issuance |
Enhance capital position |
Delegate trustee |
Deutsche Trustee Company |
Tenor |
Perpetual Non Call 6 |
Coupon rate/return |
6.75% |
Payment |
US$67.5 million on annual basis |
Currency |
US dollar |
Maturity date |
1st call date: the 20th January 2021 |
Lead managers and bookrunners |
Al Hilal Bank, Dubai Islamic Bank, HSBC, Emirates NBD Capital, National Bank of Abu Dhabi, Noor Bank, Sharjah Islamic Bank and Standard Chartered Bank |
Joint Structuring Advisors |
|
Governing Law |
English law (except the Mudarabah agreement which is under Dubai and UAE law) |
Legal advisors |
|
Listing |
|
Underlying assets |
General Mudarabah pool of the bank |
Rating |
Unrated |
Shariah advisors |
Standard Chartered, Dubai Islamic Bank, Dar Al Sharia, HSBC, Noor Bank |
Structure |
Mudarabah structure |
Tradability |
Standard secondary trading |
Face value/minimum investment |
Min Denomination: US$200,000 |
DIB’s issuance adds to the regional precedence of Islamic capital issuances — Tier 1 Perpetual Sukuk with call periods. In adding to this precedent, investors continue to drive greater comfort from this tried and tested structure that is expected to continue to aid financial institutions in raising capital via Sukuk. The bank was involved in various Sukuk transactions involving corporations such as Dubai Aviation Corporation, DIFC Investments, Emaar Malls Group, Investment Corporation of Dubai and most recently, Government of Pakistan’s US$1 billion Sukuk.