Ireland's Electricity Supply Board (ESB) is considering whether to become the first large non-financial company from Europe to sell Islamic bonds by issuing a sukuk in Malaysia.
The issue could help to develop a new source of funding for European firms as the euro zone debt crisis constrains sources of finance at home. Sukuk are bought by cash-rich Islamic funds in the Gulf and southeast Asia.
"As part of ESB's overall funding programme, we are exploring many different options and are looking at the option of a bond in Malaysia," a spokeswoman for the state-owned utility said by email on Wednesday. A sukuk is one of the options being considered, she added.
Kieran Donoghue, head of the Irish Development Authority (IDA), told Reuters that ESB was considering a sukuk issue within the next 12 to 18 months. The IDA, a government organisation which attracts foreign direct investment to Ireland, is assisting the company with the issue, he said.
A source familiar with the matter said ECB had applied to local regulators for permission to issue a sukuk, and that the company might raise 1 billion euros ($1.3 billion).
Structuring of the sukuk could begin as early as January, once the application is approved by Malaysia's central bank. It might have multiple tranches denominated in currencies such as U.S. dollars and Malaysian ringgit, the source said.
ESB operates seven thermal power stations and ten hydro stations in Ireland, and has over 12 billion euros in assets with operating profits of 469 million euros in 2011.
These assets could be used to back the sukuk; because of Islam's ban on interest payments, sukuk pay investors with profits derived from assets.
Earlier this month ESB issued a 600 million euro, five-year conventional bond through its unit ESB Finance Ltd, which is rated BBB+ by Standard and Poor's.
"The recent issuance should be able to sustain them for a while," the source said.
Liquidity needs for the company, however, will exceed 900 million euros over the 12 months from June 2012, with 700 million euros required for capital expenditure alone, S&P said in an August report.
A sukuk issue by an investment-grade European company like ESB might have little trouble in attracting investors because globally, there is a large imbalance of demand over supply for sukuk, analysts say.
In Malaysia, sukuk accounted for nearly half of total bonds outstanding in the first half of this year, reaching 421 billion ringgit ($137 billion), compared with 35 percent in the same period last year, data from the Securities Commission shows.
Because of the strong demand, some global sukuk issuers this year have been able to raise money more cheaply than they could through conventional bonds.
"For a triple-A bond or sukuk, issuers can gain savings of up to 4 basis pointss to 6 bps. This may not be very much, but if the issuance size is big, the savings can be quite substantial," a Malaysian central bank official said.
The handful of previous sukuk issues by European entities have included a 100 million euro issue in 2004 by the German state of Saxony-Anhalt, and a $10 million issue in 2010 by International Innovative Technologies, a maker of milling machines in northeast England. The Middle East unit of European bank HSBC issued a $500 million sukuk last year.
Ireland has sought to position itself as a financial services hub and identified Islamic finance as a growth area. In June, Dubai's Jebel Ali Free Zone listed a $650 million, seven-year sukuk on the Irish stock exchange.
"There is the political will and determination to develop Islamic finance," said Neil Ryan, assistant secretary for the financial services division of Ireland's Department of Finance.
He said he was aware of an Irish company planning to issue sukuk, but declined to give details. "The decision to do this is up to them, but I think it will be determined by the price they achieve," he said.
"Islamic nations have cash, and Europe needs it."
(Reuters / 20 Sep 2012)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com