Wednesday, February 27, 2013

An Islamic covered bond?

Gatehouse Bank issued a 5-year covered bond in December that has quarterly redemption rights for investors. While broadening the available types of sukuk to include the possibility for covered bonds that better align incentives for investors is beneficial, it will likely attract interest primarily from issuers of secured sukuk (and their investors). It is unlikely to attract much interest from unsecured sukuk issuers—who make up the bulk of the market—and are either unable to or unwilling to shift from a sukuk based on an asset to one explicitly backed by an asset. Gatehouse’s granting investors the option for quarterly redemption raises some troubling questions about liquidity management for Islamic financial institutions that offer longer-term sukuk with frequent redemption options.

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