Kuveyt Turk deal spurs hopes for asset-backed sukuk

A $350 million sukuk issued by Turkish bank Kuveyt Turk last month was the country's first asset-backed sukuk, and is fuelling hopes for more such issues. But they remain unlikely to become widespread in most of the Islamic world, including the Gulf, without more aggressive legal reforms.
The five-year Kuveyt Turk deal combined both asset-backed and asset-based elements, including the sale and transfer of tangible real estate to an onshore special purpose vehicle (SPV), and a portfolio of assets sold on a cost-plus-profit basis.
The issue was substantially oversubscribed by regional and international investors, and could pave the way for asset-backed deals by other Turkish issuers with real estate assets, said Rizwan Kanji, debt capital markets partner at law firm King & Spalding, who advised on the structuring of the sukuk.
In asset-backed sukuk, the underlying asset changes hands through an SPV; with asset-based deals, the issuer owns assets which are used in documentation as a pledge, but investors have no legal recourse to those assets in case of default.
Asset-backed sukuk are often seen as being closer to the spirit of Islamic law, since they allow investors to become the legal owners of underlying assets. They are also welcomed by many investors for their safety; after high-profile defaults of asset-based sukuk in the past couple of years, including Dubai's Nakheel and Kuwait's Investment Dar , investors demanded more asset-backed deals.
But about 90 percent of sukuk issues remain asset-based because of the cost and legal difficulties involved in asset-backed deals - and this may not change any time soon.
The deal by Kuveyt Turk, a Turkish affiliate of Kuwait Finance House , was a direct result of legislative changes by Turkey this year to accommodate sharia-compliant transactions. The changes allowed for onshore SPVs, abolished stamp duty and land transfer charges, and created a tax-neutral environment for Islamic finance. "Usually it is fair to say that a true sale-type structure can be cost-prohibitive to set up with various limitations," said Kanji.