* Saudi Arabia to issue debut Islamic bond in dollars
* Will comply with Dodd-Frank's risk retention rules
* Seen as precedent for future international sukuks
By Davide Barbuscia
DUBAI, April 9 Saudi Arabia has included a
disclosure on credit risk retention requirements, part of the
U.S. Dodd-Frank Act, in the prospectus of a debut dollar sukuk
which it is expected to issue this week and could total $10
The disclosure to comply with the act, which the U.S.
Congress introduced after the financial crisis to reduce
risk-taking, has not been made for other sovereign sukuk issues.
The U.S. retention rule was set to align the interests of
issuers of asset backed securities (ABS) with those of ABS
investors by asking the sponsor of an ABS securitisation to have
"skin in the game" by retaining 5 percent of the credit risk
associated with the securities it is issuing.
In its sukuk prospectus, Saudi Arabia says that it does not
consider its planned sukuk a securitisation, but that the
issuance "may be captured, as a technical matter, by the
language of the U.S risk retention rules".
Sukuk are generally considered to be asset-based, rather
than asset-backed, but in order to comply with the rules, it
will purchase at least 5 percent of the aggregate principal
amount of each tranche it issues, the Saudi prospectus shows.
Saudi Arabia's ministry of finance declined to comment.
The kingdom's decision to comply, should the rules apply,
has rung some alarm bells. "People are now worried that Dodd
Frank risk retention could apply to sukuk in general," a capital
markets legal expert of a Dubai-based firm told Reuters.
Legal firm White & Case, which worked as legal adviser for
the banks arranging the debut sukuk, said in a publication on
April 7 that "the majority of sukuk in the international markets
are asset-based, making them dependent on the creditworthiness
of the sponsor".
Since last December, U.S. credit risk retention rules have
become effective for all types of asset-backed securities
generally defined as securities collateralised by any type of
self-liquidating financial asset.
Such a definition could "cover many asset-based sukuk that
are not traditionally thought of as ‘asset-backed’ or a
securitisation," White & Case noted, with reference to certain
kinds of sukuk structures such as the murabaha one which is
partly being used by Saudi Arabia.
Given the breadth of the U.S. risk retention rules, their
potential impact must be considered when structuring
international sukuk transactions, the law firm said.
Saudi Arabia began meeting investors on Sunday ahead of the
deal, the second debt sale by the kingdom, which made its debut
in the international debt markets last year with a record $17.5
billion bond, the largest sold in emerging markets.
(Editing by Alexander Smith)