(Refiles to correct spelling of name in paragraph six and 14 to Bhansali, not Bhansalim)
By Cecilia Valente and Frederik Richter
LONDON/MANAMA Feb 10 (Reuters) - Cash-strapped Western companies are considering issuing Islamic bonds to tap Middle Eastern investors but face a challenge in choosing the right instrument, bankers and asset managers said.
Companies, especially in the UK and France, are looking to Islamic compliant investors as alternative sources of finance as the global crisis restricts their usual funding routes.
“There is a lot of interest from corporates to issue sukuk. My feeling is that as liquidity in the West gets scarce, they will look into the Middle East,” said London-based Adnan Aziz, head of sharia advisory and structuring at asset manager BMB Group.
British retailer Tesco (TSCO.L) issued its first sukuk — or Islamic-compliant debt —in 2007 for its Malaysian unit as well as raising conventional debt.
Islamic bonds do not pay interest, which is banned under Islamic law or Sharia, and are structured as profit-sharing or rental agreements, underpinned by physical assets such as real estate or commodities.
“We have discussions with clients, conventional issuers in Europe and we pitch both solutions, (bonds and sukuk) that is going to be a trend going forward,” said Vikrant Bhansali, who works for French bank Societe Generale (SOGN.PA) in London.
“In today’s world the corporate sector is interested in the right price, the format is not as important,” he said.
The sukuk market has suffered from the global credit crisis. Sukuk issuance fell in 2008 to $20 billion, the International Financial Services London estimated, down from $42 billion in 2007. In 2002, sukuk issuance made its modest first steps with an overall volume of $1 billion.
“But not all is lost,” said Aziz, adding Middle East investors are keen to put their money into Western companies and spread their risk away from domestic investments.
“Investors also understand the opportunities available in the Middle East are relatively limited and may look outside the region,” he said.
The sharia-compliant market’s ethical principles may also appeal to risk-averse investors who will increasingly want to put their money in safe instruments they can understand.
There are about ten different forms of sukuk and companies vying for Islamic cash must pay particular attention to the form of sukuk structure they use, bankers say.
The broadly used ijara form, based on a lease and buy-back of an asset, is expected to remain the most popular type at least in the first part of this year.
“In the next six to 12 months, if there are going to be issuance, it could be Ijara. People will prefer to replicate in 2009 rather than innovate, the emphasis will be to get things done rather than do things in a fancy (way),” said Societe Generale’s Bhansali.
Ijara sukuk give investors ownership of well-defined assets tied to a lease contract, whose rental is the return payable to sukuk holders. (Editing by Erica Billingham)