General Electric Co. became the first major U.S. company to sell an Islamic bond, paving the way for other Western firms to tap religiously minded investors in the Middle East and elsewhere.
On Thursday, the company's GE Capital unit sold a five-year, $500 million Islamic bond, orsukuk, and suggested more was to come.
"We intend to be regular issuers in the sukuk market and are heartened by the support we have seen in this first transaction," GE's senior vice president and treasurer, Kathy Cassidy, said.
Melding modern finance with Islamic law—which, among other things, forbids the payment of interest—is no easy task. Rather than functioning like a traditional corporate bond, a sukuk is structured to collect a stream of income from a group of underlying assets. In GE's case, the income will come from aircraft leases.
GE's sukuk sale is a major shot in the arm for the Islamic-bond market, which reeled in the wake of the global financial crisis and the collapse of real-estate bubbles in the Persian Gulf. This year, a Kuwaiti firm defaulted on its sukuk, and several issuers in the region have tried to restructure debt.
"This is a big deal," said Ibrahim Mardam-Bey, chief executive of Siraj Capital, an investment firm in Saudi Arabia. People in the industry have been "eagerly awaiting something good like this to reignite the market."
Mr. Mardam-Bey said he is working with a client, an American oil-and-gas company listed on the New York Stock Exchange, to issue a sukuk later this year or early 2010.
Borrowers already have begun returning as the crisis recedes and a tentative economic recovery takes hold. This year, issuers have sold $16.8 billion in Islamic bonds, according to data provider Dealogic, not including GE's transaction. That outstrips last year's total, but remains well below the record haul of $27.2 billion in 2007.
Among those tapping the market this year: the government of Indonesia and the International Finance Corp., an arm of the World Bank, which issued a $100 million sukuk in October.
For GE, access to new investors appears to have been worth the hassle involved in a nonconventional form of financing. To issue Islamic bonds, companies must seek the approval of scholars well-versed in Islamic law, or shariah. They also need to examine the legal and tax implications involved in issuing such debt. The transaction was "more involved than a typical bond offering," said a GE representative. "It should be more efficient next time."
The company's first sukuk is "strategically important" in opening up a new investor base, Ms. Cassidy said. Transactions like the sukuk are part of a broader effort to diversify the company's sources of funds, she said.
The yield on the bonds was 1.75 percentage points higher than comparable Treasurys, a banker familiar with the transaction said. That is only slightly higher than what GE Capital paid this month when it issued $1.5 billion of regular five-year bonds, which carried a premium of 1.55 percentage points over Treasurys.
GE's transaction is by far the largest by an American company. One earlier transaction came when East Cameron Partners, a Louisiana oil-and-gas firm, issued $166 million in Islamic bonds in 2006. The company filed for bankruptcy last year, and an initial ruling by a bankruptcy-court judge supported the bondholders' claim that they had the right to the underlying assets.
Investors and others involved in Islamic finance expressed hope that the GE transaction would prove a watershed.
"The really important thing is that big, established players are now stepping into the market; that can only increase investor confidence," said Yusuf Talal DeLorenzo, a shariah scholar based in the U.S.
source: The Wall Street Journal