• Issuers use intangible assets to underpin sukuk
• Market innovation to allow others to follow
Market participants are predicting an increase in sukuk issuance in the Gulf region over the next two years, as innovative structures expand the range of assets that can be used as underlying sources of profit.
Qatari state-owned telecoms firm Ooredoo, for instance, made its debut in Islamic bonds last month, pricing a US$1.25bn 3.039% 2018 sukuk.
Unusually, the company used phone airtime as the underlying asset, paving the way for other telecommunications firms to follow.
Dubai's flagship airlines carrier Emirates, meanwhile, issued a US$1bn 3.875% 10-year amortising sukuk using revenues per passenger as the underlying asset.
The tactic to use an intangible asset may serve to widen the base of borrowers that could access the market.
Rather than paying a coupon, sukuk offer investors a share of the profit generated by an asset held by the issuer. Traditionally, issuers have used land or property leases as the underlying asset.
This limits the issuer base because not every company holds assets extensive enough to issue on a regular basis.
Ooredoo, for example, may not have sufficient property assets to underpin more than a couple of sukuk.
"Ooredoo could have issued a sukuk without using this structure, but using airtime for the purposes of structuring allows the company to issue on a regular basis in the future," said Hani Ibrahim, head of DCM at QInvest, a bookrunner on the transaction along with DBS, Deutsche Bank, HSBC and QNB Capital.
The fact that two well-recognised companies have issued deals of this nature will encourage others to take the same path.
"Anything innovative tends to be done by very good credits, household names if you like. When an Emirates or a Ooredoo does a deal like this, it opens the doors for others," said Noel Lourdes, an executive director for Amanie Advisors, an Islamic financial advisory firm.
Ooredoo is not the first company to use mobile phone airtime to complete an Islamic finance deal. Malaysia's Axiata has used the structure in the past, while Saudi Arabia's Mobily used airtime as an underlying asset in the loan market in March 2008.
UAE's Etisalat considered a similar structure as well, but the deal did not come to fruition.
As a result, Ooredoo's is the first sukuk of its kind in the Gulf, and the first such sukuk or loan in the region since the crisis.
This shows that some innovation is returning to the market, said Farmida Bi, a partner and European head of Islamic finance at Norton Rose Fulbright.
"If you look back at the Islamic market in 2006-7, there were some interesting structures pushing the boundaries, such as a pre-IPO convertible sukuk [by Nakheel], but the crisis forced people to become more cautious," she said.
"It now feels there is more scope to tap into the broader market, and issuers are becoming braver in the type of assets they are using as underlying securities," she added.
This will open the potential pool of issuers coming into market, she said.
However, one banker sounded a note of caution, saying that a balance has to be found between innovation and getting too far away from the Islamic principles that govern the asset class.
"Generally in the GCC, in Saudi Arabia and Qatar in particular there is a move towards trying to do more things in Islamic finance," said Ibrahim of QInvest.
"I think we will see more innovation but there has to be a balance – Sharia compliance is very important and the Islamic scholars are conscious not to let people push the boundaries too far," he said.