Rule 144A was introduced to enable institutions such as investment banks to trade securities amongst themselves while providing exemption from the strict rules in marketing such securities to the general public. The rule helped the development of bond markets and enhanced liquidity. Applying the same exemption to corporate Sukuk could facilitate issuance and trading within the US. GCC-based Shariah compliant companies, including Islamic banks and Takaful operators, could raise funds through Sukuk issuance in the US without having to make full financial information available to qualified investors such as asset managers and investment banks. Exemption under Rule 144A will undoubtedly be beneficial for wholesale transactions, but such measures have little relevance to retail banking and the financial needs of the American Muslim community. They are largely about attracting foreign institutions into US capital markets and creating opportunities for large US investment banks, not about the average American Muslim struggling to keep his job or to find a new job. The concept of an IIFM is appealing as such a market could facilitate Sukuk trading and treasury management by Islamic financial institutions. In practice, however, the IIFM largely organizes conferences and workshops, and despite its name does not function as a market. Instead, national markets predominate, Malaysia being the most active Sukuk market and Islamic money market. As there are many commercial companies organizing Islamic finance and capital market conferences, the need for the IIFM to play this role is less clear.
PROFESSOR RODNEY WILSON
Complying with Rule 144A will enable the Sukuk to reach a larger investor group, as it allows for them to be traded freely between Qualified Institutional Buyers (QIB). The disadvantages of complying with Rule 144A are mainly associated with cost for additional requirements and registration. It is the seller’s ultimate responsibility to ensure that the buyer is a QIB and to keep a record of the information obtained for this requirement which includes, but is not restricted to, recent financial statements and certification by the CFO or equivalent specifying the amount of securities owned and invested on a discretionary basis. All data that is obtained must be no older than a prescribed period before the date of the sale. The securities offered may not be of the same class as securities listed on a US exchange and cannot be of certain types in order to classify. Additional record keeping, responsibilities and registration requirements increase the cost for the issuer and sellers which will eventually be paid for by the buyer of the security. This cost may be justified, but needs to be taken into consideration prior to applying Rule 144A. DR NATALIE SCHOON Head of product research, Bank of London and the Middle East
Securities offered under Rule 144A guidelines can only be sold to qualified institutions, such as pension funds. While the size of this asset base is vast, these institutions typically have specific exposure limits for unregistered securities. In this context, Sukuk issuers will be competing for limited capital with a cacophony of issuers, across both debt and equity instruments. For example, Rule 144A commonly provides cover for international corporates to sell IPO issues in the US market. The opportunity here is for qualified US investors to begin to better appreciate the Sukuk instrument, giving Islamic finance a better footing in the US. The downside is that the “unregistered” bucket may not be the best space in which to attract capital, given the competing and disparate demands on buy-side analysts who cover the 144A market. Sukuk issues run the risk of being marginalized as exotic, as they struggle to find the right stance within the US institutional universe. The challenge is for Sukuk issuers to fund an appropriately robust marketing communications budget to ensure that specific issues nest within a portfolio investment strategy. In sum, the sell-side has to be prepared to answer the question, “But what do I do with it? DOUGLAS CLARK JOHNSON CEO, Codexa Capital
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