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Investors invited to buy into Dubai airport Sukuk

US $750 million Islamic bond aims to tap cash repatriated from USA in recent times

The Government of Dubai has opened a US $750 million Sukuk Al Ijara (Islamic bond) to part finance the $4.1 billion development of the emirate’s international airport. This is the largest Sukuk issue in the history of Islamic banking. It confirms the revelation in January by Construction Week that government funding would cease by the middle of this year (see Issue 8). CW was told that the balance of finance would come from funds generated in-house and those raised from banks and the public.

The Sukuk was presented to investors by Sheikh Ahmed bin Saeed Al Maktoum, DCA president and chairman of Emirates Group, and by Dr. Mohammed Khalfan bin Kharbash, UAE Minister of State for Finance & Industry and chairman of Dubai Islamic Bank (DIB). The presentation started off a roadshow that will move on from Dubai to other countries in the region including Bahrain and Kuwait.

DIB, which is acting as mandated lead manager, will also be one of the joint book-runners alongside Citigroup and HSBC. The issue is fully underwritten by a six-member group of banks including the three book-runners and Gulf International Bank, Kuwait Finance House and Standard Chartered Bank. The issue is likely to be listed in Luxembourg for global investors and on the Dubai Financial Market for regionals.

The offer apparently aims to tap into the Islamic funds that have flowed out of the US and other Western markets following the 9/11 incident. Islamic finance activity in the Gulf has spurted in recent years, but opportunities for investment are not said to have kept pace with the surplus capital that is available.

Welcoming investors, Sheikh Ahmed stated that the Government of Dubai had taken a conscious decision to opt for Islamic financing. “What better way to channel the liquidity in the region than to deploy it in local projects. The Islamic banking sector has been progressing at a rate few of us could have anticipated. This is a welcome development, precipitated by local and international banks. This Sukuk is important to the development of Dubai and is crucial to our local and regional businesses.”

Dr Kharbash pointed to Dubai’s “bold decision” to take a different direction when considering Dubai’s funding requirements for its projects. “I believe that the decision to opt for Islamic funding is a positive sign for all of us. It signals the maturing of Islamic finance and that it is no longer niche funding for a limited range of projects.”

Deepak Kohli, head of capital markets at Stanchart pointed out that the DCA Sukuk would help bolster the growing global Islamic finance market and also allow the government to tap a major funding source in the GCC. Being a dollar-denominated security open for investment to conventional investors, the DCA Sukuk will become a benchmark for pricing other securities. Earlier, Sheikh Ahmed had said that the DCA is committed to finance the expansion project from external sources. Repayment of the borrowings is to come from airport income.

The second phase of the airport’s expansion programme was begun in the first quarter of 2002 and is scheduled to finish by 2008. It includes construction of Terminal 3, Concourse 2 and Concourse 3, Mega Cargo Terminal, Flower Centre, runway, taxiways and other infrastructure and special airport systems. With major part of the expansion yet to be paid for, the $750 million Sukuk is not expected to be the last or only way the airport development will be financed.

Dr. Kharbash has urged other UAE entities to go the Sukuk way for project financing. There are many on-going and planned projects in the UAE and the region, financed in the main by investors and buyers’ funds. Project finance from other sources is as yet limited.

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