The first UK Islamic bond (sukuk) has been launched in a significant development that could prompt other British companies to raise money in the niche market.
International Innovative Technologies (IIT), a maker of industrial milling machines in north-east England, has raised $10m through a private equity style bond (sukuk) to help develop new products, its legal adviser, Norton Rose, said.
Though IIT is a small British manufacturer, this Islamic bond issue from them is likely to be the first of many similar sukuk fundraisings in the UK, say analysts.
Also, the UK government is expected to pave the way for the launch of the first "sovereign sukuk", a bond that complies with Islamic religious rules, in the next year or two.
Farmida Bi, who worked on the transaction, said: “There is absolutely no reason [why] other corporates and government entities cannot follow suit. They [IIT] found an investor which could only invest in a sharia-compliant way, hence the structure. This is important. Many Islamic investors are looking at potential investments, particularly in the high-tech sector.”
Dubai-based Millennium Private Equity will be the sole investor in the IIT bond, which will be listed on the Cayman Islands Stock Exchange. The sukuk will pay 10 per cent a year and will expire in 2014.
Although it is only a small amount, it is an important development for sukuk in Europe. The sector, which involves paying investors profits from the underlying business rather than interest payments that are banned by the Koran, is forecast to see much wider use by non-Muslims.
Britain is viewed as the most advanced Islamic finance centre in Europe, having changed its legislative and tax frameworks to accommodate the tenets of Islamic law.
It has hosted sukuk listings for foreign issuers, but until now neither a government or a European company has sought to tap Islamic investors.
Worldwide sukuk issuance topped $13.7bn in the first half of 2010, almost double the amount recorded in the first half of 2009, according to S&P.
The IIT sukuk uses a so-called musharaka structure, also known as profit and loss sharing, allowing the investor Millennium an option to take a stake in IIT.
Sukuk are generally certificates of ownership of either an asset or a project, or as in the IIT case, a business venture.
In musharaka, parties contribute capital to a venture with profits to be shared in an agreed ratio, while losses are generally divided in line with capital contributions.
David Oakley, "First UK Islamic bond launches" Financial Times August 16, 2010
"Islamic bond is a milestone for IIT" This is Money August 17, 2010
Cecilia Valente, "UK firm to launch first European corporate sukuk" Reuters August 17, 2010