IFC Lists US$100 Million Sukuk on Nasdaq Dubai and Bahrain Stock Exchange

On 4 November 2009,  the International Finance Corporation, the private sector lending and investing arm of the World Bank Group, registered a US$100 million Sukuk ("Islamic Bond issue") on Nasdaq Dubai and the Bahrain Stock Exchange.

Those watching the financial news have seen this story develop from earlier announcement (October) to today when the deal was done.  Here's the press release from Nasdaq Dubai.

Deal details: 

1. Issuer:  Hilal Sukuk Company Cayman Islands, a special purpose vehicle created for this transaction.  
2. Obligor:  International Finance Corporation ("IFC")
   
3. Annual Profit Rate (Coupon):  3.037 percent per annum payable semi-annually (May and November). 
4. Final Maturity:   May 2014.

Deal "firsts":

1. First Sukuk issued by IFC.  
2. First Sukuk issued by a non GCC financial corporation for term funding.
   
3. First IFC listing in Dubai and Bahrain Stock Exchange.  
4. First use of Nasdaq Dubai's central securities depository (electronic certficate form).
   

The prospectus for the transaction is here for those interested in more detail.  And as well the fatwa as to Shariah compliance.

There is a convenient transaction diagram in Section 1 which is a good introduction to those not familiar with the structure.

The key issue with a structure like this is the nature of the certificate holders' rights in the Trust Assets (the assets whose cash flow is the sole source of repayment of the Sukuk).

Often there is confusion on this topic.

Is the right to the assets themselves? 

Or the right to the cashflow from the assets?

If the transaction is truly collateralized by the assets, the certificate holders may upon a default take possession of the assets and sell them to a third party.

A few sections from the prospectus appear to settle this question.

1. Page 11 Risk Factors Limited Recourse:  "Furthermore, under no circumstances shall any Certificateholder or the Trustee or the Delegate, as the case may be, have any right to cause the sale or other disposition of any of the Trust Assets except pursuant to the Purchase Undertaking and the sole right of the Trustee and the Certificateholders against IFC shall be to enforce the obligation of IFC to pay the Exercise Price under the Purchase Undertaking."
2. Page 15 Transfer of the Investment Assets:  "Nevertheless, the Certificateholders will not have any rights of enforcement as against the Investment Assets and their rights are limited to enforcement against IFC of its obligation to purchase the Trustee’s rights, title and interest in and to the Investment Assets pursuant to the terms of the Purchase Undertaking. Accordingly, any such restriction on the ability of IFC to make a "true sale" of the rights, title and interest in and to the Investment Assets to the Trustee is likely to be of limited consequence to the rights of the Certificateholders."

Should investors be worried?

The World Bank Group carries the highest investment grade rating.  It is owned by the countries of the world.

If there is a future problem with the creditworthiness of the World Bank, it will be reflective of extremely serious global problems.  In that case collection of this bond will be among the least of investors' worries.