October 1, 2014 / 6:42 AM / 5 years ago

Luxembourg's debut sukuk sees strong demand from government accounts

Oct 1 (Reuters) - Luxembourg has issued its first 200 million euro ($254 million) five-year Islamic bond, distributed across 29 accounts with an order book that was more than two times oversubscribed, the finance ministry said.

Luxembourg becomes the first AAA-rated government to issue euro-denominated sukuk, or Islamic bonds, following London, Hong Kong and South Africa in issuing sharia-compliant debt this year.

The choice of currency might have dampened appetite for the deal in a market which favours dollar-denominated sukuk.

Luxembourg’s sukuk attracted orders smaller than the $2.2 billion and $4.7 billion that South Africa and Hong Kong achieved for their respective dollar-denominated deals.

The AAA-rated sovereign priced the sukuk at a profit rate of 0.436 percent, with half of the sukuk placed with central banks and other official institutions, the finance ministry said late on Tuesday.

Banks took 40 percent of the issue, highlighting the growing appetite for high-rated listed sukuk that can qualify for use by Islamic banks to help meet their capital adequacy requirements.

By geographic distribution, 61 percent of the issue was allocated to investors from the Middle East, while European investors took 20 percent and Asia 19 percent.

The sukuk, rated AAA by Standard and Poor’s, used an ijara structure, a sharia-compliant sale and lease-back contract which is underpinned by government-owned properties.

Sovereign sukuk like the one from Luxembourg are designed to boost the Islamic finance credentials of issuing governments to help attract business from the Gulf and southeast Asia.

The Duchy has built an active role in the industry: it is a major domicile for Islamic mutual funds and remains the only regulator in Europe that is a member of the Malaysia-based Islamic Financial Services Board, one of the industry’s main standard-setting bodies.

Luxembourg hired HSBC, BNP Paribas, Banque Internationale à Luxembourg and Qatar-based QInvest to arrange its sukuk. (Editing by Kim Coghill)

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