Saudi readies debut dollar sukuk with US risk disclosure

Dubai: Saudi Arabia has included a disclosure on credit risk retention requirements, part of the US Dodd-Frank Act, in the prospectus of a debut dollar sukuk which it is expected to issue this week and could total $10 billion.
The disclosure to comply with the act, which the US Congress introduced after the financial crisis to reduce risk-taking, has not been made for other sovereign sukuk issues.
The US retention rule was set to align the interests of issuers of asset backed securities (ABS) with those of ABS investors by asking the sponsor of an ABS securitisation to have "skin in the game" by retaining 5 per cent of the credit risk associated with the securities it is issuing.
In its sukuk prospectus, Saudi Arabia says that it does not consider its planned sukuk a securitisation, but that the issuance "may be captured, as a technical matter, by the language of the US risk retention rules".
Sukuk are generally considered to be asset-based, rather than asset-backed, but in order to comply with the rules, it will purchase at least 5 per cent of the aggregate principal amount of each tranche it issues, the Saudi prospectus shows.
Saudi Arabia's ministry of finance declined to comment.
The kingdom's decision to comply, should the rules apply, has rung some alarm bells. "People are now worried that Dodd Frank risk retention could apply to sukuk in general," a capital markets legal expert of a Dubai-based firm told Reuters.
Legal firm White & Case, which worked as legal adviser for the banks arranging the debut sukuk, said in a publication on April 7 that "the majority of sukuk in the international markets are asset-based, making them dependent on the creditworthiness of the sponsor".
Since last December, US credit risk retention rules have become effective for all types of asset-backed securities generally defined as securities collateralised by any type of self-liquidating financial asset.
Such a definition could "cover many asset-based sukuk that are not traditionally thought of as ‘asset-backed’ or a securitisation," White & Case noted, with reference to certain kinds of sukuk structures such as the murabaha one which is partly being used by Saudi Arabia.
Given the breadth of the US risk retention rules, their potential impact must be considered when structuring international sukuk transactions, the law firm said.
Saudi Arabia began meeting investors on Sunday ahead of the deal, the second debt sale by the kingdom, which made its debut in the international debt markets last year with a record $17.5 billion bond, the largest sold in emerging markets.