The government has today (25 June 2014) cemented Britain’s position as the western hub for Islamic finance by becoming the first country outside the Islamic world to issue sovereign Sukuk, the Islamic equivalent of a bond.

The government confirmed that £200 million of Sukuk, maturing on 22 July 2019, have been sold to investors based in the UK and in the major hubs for Islamic finance around the world.

The UK’s first sovereign Sukuk received very strong demand, with orders totalling around £2.3 billion, and allocations have been made to a wide range of investors including sovereign wealth funds, central banks and domestic and international financial institutions.

Investors from the major centres for Islamic finance in the Middle East, Asia and Britain were all represented in the final allocation.

The profit rate on the Sukuk has been set at 2.036% in line with the yield on gilts of similar maturity.

The Chancellor of the Exchequer George Osborne said:

Today’s issuance of Britain’s first sovereign Sukuk delivers on the government’s commitment to become the western hub of Islamic finance and is part of our long term economic plan to make Britain the undisputed centre of the global financial system. We have seen very strong demand for the Sukuk, resulting in a price that delivers good value for money for the taxpayer. I hope that the success of this government issuance will encourage further private sector issuances of Sukuk in the UK.

By issuing sovereign Sukuk, the government has demonstrated that it is possible to create a successful British base for Islamic finance.

Britain’s sovereign Sukuk uses the Al-Ijara structure, the most common structure for sovereign Sukuk, with rental payments on property providing the income for investors. The Sukuk is underpinned by three central government properties. Today’s issue will settle on 2 July 2014, and will be listed on the London Stock Exchange.

Read HM Treasury UK Sovereign Sukuk PLC’s Offering Circular - it contains detailed information on the UK’s debut sovereign Sukuk issuance.

Background

In October 2013, the Prime Minister announced that HM Treasury was working to issue UK sovereign Sukuk worth around £200 million.

In January 2014, HSBC and Linklaters were appointed by HM Treasury as structuring and legal advisers respectively, to work with it to issue UK sovereign Sukuk in financial year 2014-15. As set out in the tender process, the structuring bank was also appointed to act as a Joint Lead Manager at the later syndication stage.

An open and competitive process to appoint a syndicate of banks as Joint Lead Managers (alongside HSBC) was launched on 23 May 2014. On 12 June 2014, the government announced that it intended to issue the Sukuk in the coming weeks, subject to market conditions, and confirmed the appointment of Barwa Bank, CIMB, the National Bank of Abu Dhabi and Standard Chartered as Joint Lead Managers for the sale alongside HSBC.

Following a series of roadshows beginning on 17 June 2014, at which officials from HM Treasury and the DMO met with potential investors in the Middle East, Asia and London, HM Treasury UK Sovereign Sukuk PLC (the Special Purpose Vehicle solely owned by the government) decided to launch the sale on 25 June 2014.

The order book managed by the Joint Lead Managers opened at 8.30am on 25 June 2014 with indicative price guidance for investors at a spread of 0bps to 2bps above the reference gilt, 1¾% Treasury Gilt 2019. The Joint Lead Managers announced around 10am that the value of orders in the book was approaching £2 billion. At 10.30am the Joint Lead Managers announced that the value of orders in the book was in excess of £2 billion, that the price guidance had been tightened to flat to gilts (0bps) and that the book would close at 10.45 am. The book closed with 75 orders totalling around £2.3 billion.

At 12.45pm the profit rate, which corresponds to the cost of servicing the Sukuk for the government, was set at 2.036%.