Gov’t plans $1-B Islamic bond float

MANILA, Philippines—The government plans to tap the Middle East by offering as much as $1 billion worth of “sukuk,” or Islamic bonds, to raise long-term funding for Metro Manila’s overhead Metro Railway Transit (MRT) in early 2009, an investment banker familiar with the deal said.

State-owned Al-Amanah Investment Bank, which will soon be controlled by the state-owned Development Bank of the Philippines (DBP), will likely be at the forefront of the Islamic bond float, said Roberto Juanchito Dispo, executive vice president at First Metro Investment Corp.

First Metro is one of the banks being considered to help with the sukuk issuance along with large Islamic financial institutions like CIMB group of Malaysia and Jeddah-based Islamic Development Bank (IDB), the global Muslim community’s multilateral lending arm, he said.

The bonds are expected to carry a five-year term, Dispo said.

“DBP is doing the bridge financing,” he told reporters. “We’re doing the more permanent financing, which is via sukuk.”

“Once the government has bought back the MRT asset through the bridge financing arranged by DBP, the same assets will be used by the government as underlying asset for the Islamic bond issue,” he said.

Unlike conventional bonds, sukuk pay profits or rent from an underlying asset, with the securities representing part ownership of the asset, as paying of interest is forbidden under Islamic law.

“This is a perfect asset because MRT has a lease income stream, so this income stream will be used as payment for the investors of the Islamic bond to be distributed in Islamic countries which are cash-rich now,” Dispo said.

The government wants to buy out the 17-kilometer MRT, which runs on the EDSA highway—to save on future costs, with improved finances giving it flexibility to borrow cheaper money. It pays 15 percent in annual interest to be able to remit equity payments to the consortium that operates the MRT until the build-lease-transfer contract ends in 2025.

“Toward the tail end of this [sukuk bond] structure is the re-privatization of the MRT, because the government doesn’t want to hold on to the asset,” Dispo said.

“They’re not engaged into the business of running mass railway transit projects so there’s a re-privatization component,” he said.

In a separate interview, DBP president Reynaldo David said that, after DBP finishes its takeover of Al-Amanah, the plan was to tap the sukuk bond structure.

“We’re still working on the bridge financing for the MRT buyout,” David said.

Dispo said CIMB and IDB’s participation in the structure would be a big boost to government efforts to tap the Islamic investing community.