Goldman Sachs gets back in the sukuk business

In a landmark offering made on the 16th September 2014, Goldman Sachs became the first US bank to issue sukuk. Sources say the New York-based lender attracted bids for three times the US$500 million of sukuk it sold. The five-year sukuk was priced to yield 90 basis points, or 0.9 percentage point, over the benchmark midswap rate.

The sukuk are to be issued through a vehicle called JANY Sukuk Co and guaranteed by Goldman Sachs. Proceeds of the issue will be used in the commodities business of a unit of Goldman, J Aron & Co. They have been rated ‘A minus’ by S&P and A by Fitch Ratings, which is the same rating for Goldman Sachs overall as an enterprise. Goldman picked itself, Abu Dhabi Islamic Bank, Emirates NBD, National Bank of Abu Dhabi, Qatar’s QInvest and the investment banking arm of Saudi Arabia’s National Commercial Bank to arrange the issue. Investor roadshows took place only in the Gulf.

“We are pleased to see continued interest in Islamic finance from a bank with the reputation of Goldman Sachs,” says Ahsan Raheem, CFA®, of US-based investment advisor Azzad Asset Management. “It is important for our industry to have a wide base of sukuk issuers.” Raheem is also the author of the paper, “International Sukuk: A Need for More Disclosure and Better Transparency” featured in the 2014 Thomson Reuters Sukuk Perceptions and Forecast Study.

The offering comes on the heels of an unsuccessful attempt by Goldman to bring a sukuk to market in 2011 using a murabahah arrangement. Some Islamic scholars consider the murabahah structure to be controversial, and as a result, this time the investment bank opted for a predominantly wakalah structure in which one party manages assets on behalf of another.

Raheem notes that the sukuk issue is expected to appeal to an institutional base, primarily sovereign wealth funds and banks interested in managing liquidity and cash. Some have questioned why Goldman, a firm with deep pockets and ample access to capital, would venture back into the world of Islamic finance. According to Raheem, the advantage is clear: “It represents a diversification of their capital base,” he says. “Strategically, a company like Goldman Sachs wants to tap capital from all corners of the world, especially the Middle East.”

The Goldman sukuk offering illustrates the growth of Islamic finance beyond the traditional markets of the Middle East and Southeast Asia. HSBC carried out a $500 million sukuk issue in 2011. Other conventional banks may follow as they seek to tap into a large new source of funding: France’s Societe Generale and Japan’s Bank of Tokyo-Mitsubishi UFJ are ramping up their sukuk operations in Malaysia this year. On the corporate front, US firm General Electric has already issued sukuk.

At the national level, the UK became the first “non Muslim-majority” country to issue sovereign Islamic bonds in June with a sale that lured orders for 10 times the amount offered. Hong Kong raised US$1 billion in a debut sukuk that came a week before the Goldman Sachs announcement.

Islamic financial assets globally are expected double to US$3.4 trillion in the five years through 2018, according to forecasts from Ernst & Young.

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