British-based, sharia-compliant investment firm Solum Asset Management will launch the first investment sukuk in the first quarter of next year, treating Islamic bonds as investment vehicles rather than debt instruments, its chief executive said.
Unlike traditional sukuk, which are akin to conventional debt products, the 200 million sterling ($310 million) Student Accommodation Investment Sukuk will use equity to provide holders with an annual yield of 4 to 6 percent, said chief executive Safdar Alam at the company's launch in Bahrain.
Alam, former head of Islamic finance at J.P. Morgan, said the company was seeking to delink Islamic finance products from debt-heavy conventional finance.
Our stance is that sukuk in its purest sense is an investment vehicle, he said. We could go to market with this as a fund, but we've made the deliberate choice to launch it as an investment sukuk.
Alam said the industry had too closely mimicked the conventional finance sector, especially in allowing sukuk to be used as debt instruments despite Islam's prohibition of interest.
Unlike a traditional sukuk, where holders bear the risk of the issuer's creditworthiness, risk in the investment sukuk will be based on the assets that are bought by the fund. There is no question of recourse in the event of a default, Alam said, as investors will own the underlying assets outright.
Issues surrounding lack of recourse in the event of a default have plagued the Islamic finance industry since Dubai World property arm Nakheel's asset-based sukuk nearly defaulted in 2009.
The whole question of asset-backed or asset-based is the result of sukuk being debt products, Alam said. As an equity structure, it will be a true sale to sukuk holders, and they take the risk and return of the assets.
The multiple-tranche Student Accommodation instrument will have a tenor of between five and seven years. Holders will provide funds that Solum then invests into income-generating student housing in Britain, which is expected to maintain strength despite the downturn in the larger real estate market.
At the end of the tenor, the real estate assets will be sold to another fund which Solum creates, and investors can redeem their certificates and either cash out of the investment or reinvest in the new fund.
We fully expect to raise funds from investors far in excess of 200 million pounds, Alam said. But we don't want to make it too big, which becomes inefficient. We will then have another tranche shortly after the first tranche closes to meet demand.
Solum Asset Management is aiming to launch a second product, the 200 million sterling UK Social Housing Investment Sukuk, in the fourth quarter of 2012, and the five-year, 500 million to 1 billion sterling Global Islamic Liquidity Investment Sukuk in the first quarter of 2013 to provide banks with interbank cash flow from a portfolio of assets.
In some ways, we seek to serve as a wake-up call to the industry, he said. We want to prove that there can be a commercially viable investment option that does not rely on leverage. There is no leverage used in our company or any of our products.
(Editing by Andrew Torchia)