Biggest-ever Islamic bond issue attracts huge demand

Dubai: Local and foreign investors are rushing to subscribe to the world's biggest-ever Islamic bond issue, the $2.8 billion sukuk of Dubai's Ports Customs and Free Zone Corporation (PCFC), the joint book runner to the issue said yesterday.

Faisal Mikou, a director at Barclays Capital told Gulf News that the investors were attracted by the convertible sukuk's indicative yield of 7.25 per cent to 8.25 per cent which is some 250 to 350 basis points over a two-year dollar Libor swap.

The bond's innovative structure that promises favourable allotment in the planned pre-2007 initial public share offer of the PCFC Group, the holding company of Dubai ports unit DP World and Jebel Ali Free Zone, is also luring buyers, he added.

The innovative structure is a first in the Islamic finance world.

"We were confident of the success of the transaction but we are pleasantly surprised by the market's interest in the issue from across the board," Mikou said by phone from London.

He said that there has been strong interest to subscribe from Islamic institutions, banks, asset management companies and high net worth individuals.

"We have strong interest from across the GCC and Europe and we also have some interest from Asia," he said.

PCFC is raising the money for "general corporate activities, ongoing business development and expansion plans", but the issue is not conditional on the completion of DP World's $5.7 billion bid last month to buy Britain's P&O, the world's fourth-biggest port operator.

Mikou said the sukuk's pricing was fair considering the size of the issue and reflected the risk profile of the transaction, which does not include a guarantee by the Dubai government even though PCFC is fully state-owned.

A spokesman for Dubai Islamic Bank, the other book runner, said the sukuk offers an attractive yield because repayments are not dependent on cash flows of the borrowing company but from a future IPO of a strategic government asset.

Under the offer, the bonds will be repaid within two years, with 70 per cent returned in cash and 30 per cent as equity shares from the planned public offering.

If no IPO takes place prior to the final redemption of the sukuks, investors would be compensated with a higher yield.

Sources said that it was most likely that a new holding company would be set up for DP World, Jebel Ali Free Zone and possibly P&O, which would be floated.

Mikou said average allocations in recent IPOs in the region have been less than one per cent so the favourable allotment in a possible future float was attractive.

"I think PCFC and DP World have been very clever with the financing. The deal was structured in such a way to give them flexibility while ensuring that such a large issue doesn't struggle in the market."

The issue is expected to close this week.

Mikou said PCFC is also likely to raise another $6.5 billion through a syndicated loan early next year if its unit, DP World, successfully completes the acquisition of Peninsular & Oriental Steam Navigation Co. (P&O).

The acquisition of P&O will make DP World the third-biggest ports group globally, although speculation has grown in the past week of a counter bid by Singapore's state-owned investment company Tem-asek Holdings.

Biggest-ever Islamic bond issue attracts huge demand