First UK Sukuk for British Bank

Al Rayan Bank PLC has become the first UK bank to issue a Sukuk. The £250 million sterling denominated issuance is backed by UK mortgages with a maturity of 2052. Al Rayan bundled 1,672 home purchase plans to act as security for its sukuk, which has been issued through a special-purpose vehicle called Tolkien Funding Sukuk, named after author JRR Tolkien, the famous Birmingham resident where Al Rayan Bank is headquartered. Al Rayan and Standard Chartered acted as the joint lead managers, with Legal advice provided by Norton Rose Fulbright.

The Sukuk was oversubscribed with final demand at 155% of book, reflecting the strong demand for Islamic financing instruments that exists in the market, and the fact that the UK is well positioned to become the destination of Sukuk issuance for Western Europe.

The last Sukuk originating out of the UK was the UK Sovereign Sukuk issued in 2014, though an issuance by Emirates Airlines in 2015 for $913 million was guaranteed by the UK Government.

Demand from investors has been significant, with European RMBS investors and conventional and Islamic banks and pension funds all represented in the final allocation. Commenting on the successful issuance Sultan Choudhury OBE, CEO, Al Rayan Bank, said: “The issuance of this ground breaking Sukuk is a major landmark in the history of Al Rayan Bank, but it is also a significant development for the global Islamic finance sector which reinforces the UK’s position as a global hub for Islamic banking. Tolkien Sukuk has been designed to ensure that it is recognisable as High Quality Liquid Assets (HQLA) and as a securitisation under CRD definitions; this has resulted in high levels of demand from conventional institutions as well as from Islamic investors.”

Proceeds raised from the Sukuk issuance will be used by Al Rayan Bank to fund further growth in its asset book, which has increased by more than 23% over the last 12 months.

Rated Sukuk

The transaction was priced at Sterling 3 months’ LIBOR plus 80bps. The securitisation of residential assets is provisionally rated AAA by Standard & Poor’s (S&P) and Aaa by Moody’s Investors Service (Moody’s).

Whilst assigning the Sukuk a provisional Aaa rating, Rodrigo Conde Puentes, Assistant Vice President and Analyst at Moody’s stated “The certificates to be issued by Tolkien Funding Sukuk No.1 Plc represent our first-rated Sukuk transaction in the UK,” and added “Islamic Finance is an increasingly important part of global capital markets — there is growing demand for investment and financing that conforms with the ethical and moral principles of the Islamic faith.”

The transaction is a static securitisation of “Diminishing Musharakah with Ijara finance” contracts extended to individuals in England and Wales. The portfolio consists of first lien Home Purchase Plans (HPPs) extended to [1,672] customers secured by residential properties, with a current pool balance of approximately GBP [301.4] million.

The HPPs are structured as “Diminishing Musharakah with Ijara” (reducing co-ownership with lease) arrangements; at the time of the origination, the client chooses a property, agrees the price with the vendor and then purchases the property with the bank. The bank then sells its share in the property to the client in installments over a fixed term (the acquisition payments). In addition to the monthly acquisition payments, the client pays rent to the bank for the portion of the property owned by the bank. The rent is assessed quarterly and benchmarked to the Bank of England base rate (BBR), although the rent can be fixed for a period of time.

S&P Global Ratings assigned preliminary ratings to the first UK transaction backed by Sharia-compliant form of residential housing finance. In this CreditMatters TV segment, S&P Global Ratings Director Irina Penkina comments on the specific features of transaction.