Short review of a 2019 UK corporate sukuk

I often get behind reading the magazine "Islamic Finance News" despite writing a monthly column in it!

Recently, while catching up, I realised from a September 2020 story that I had somehow missed an important news item a year previously. That was the issue of a sukuk by a UK company from outside the financial sector.

With regard to the financial sector, I have previously written about the Al Rayan Bank sukuk issue of February 2018.

The story I had missed was the issue of a sukuk to finance NQ Minerals plc reported in September 2019. Accordingly, after becoming aware of it, I devoted my October 2020 monthly column to writing about that sukuk issue.

A closer look at the NQ Minerals plc sukuk

In the 23 September 2020 issue of Islamic Finance News, I read about a recent sukuk to finance P1 Capital Ltd, issued by Al Waseelah plc (“AW”) and managed by Bedford Row Capital Advisers Limited (“BRCAL”).

The article also mentioned a 2019 sukuk issue by AW and BRCAL to finance the mining group NQ Minerals plc (“NQ”). I had missed the original story about this sukuk in the IFN issue of 11 September 2019.

As corporate sukuk has been very slow to take off in the UK, I decided to take a closer look at the 2019 sukuk. This was in the form of “Up to US$50,000,000 10% Secured Certificates Due 2026” listed on the Frankfurt Stock Exchange.

After trying and failing to find the sukuk prospectus on the internet, I contacted BRCAL. They graciously sent me a copy. [Linked in the previous paragraph.] I also had a Zoom call with BRCAL’s CEO, Dr Scott Levy; this was about the company and his career rather than the details of the NQ sukuk.

The description of the sukuk issue below is entirely based upon my reading of the prospectus and the relevant published accounts which are publicly available from the UK Government website. Any errors are mine, and BRCAL has no responsibility for my text.

Very briefly, AW raised (if all the notes were issued which I have not been able to check) US$ 50 million by issuing the sukuk certificates to investors. The prospectus states that 10% of the issue proceeds would be retained by AW “to cover the ongoing operating expenses as part of the relevant Issuer Collateral Account for the purposes of the creation of an expense and liquidity reserve.”

The balance was used to enter into a commodity murabaha transaction with NQ. Under this NQ bought the commodity from AW with deferred payments starting six months later and running through to the 2026 redemption date. While some Shariah scholars frown on commodity murabaha transactions, they are a convenient way for one party to provide cash finance to another party.

With all Islamic finance transactions, it helps to ask what conventional finance transaction the Islamic one is replicating. Here the sukuk issue is replicating a fixed rate debt issued by NQ. There are some unresolved points of detail.

The certificates are described as secured. However, it is clear from the prospectus that they are only secured on the assets of AW. The asset of AW in connection with this transaction is simply the right to be paid the deferred consideration due from NQ for the commodity murabaha transaction.

Accordingly, unless there is additional security created under the terms of the commodity murabaha agreement (a document I have not seen), what the sukuk investor owns is, in economic terms, an unsecured liability of NQ, via the AW certificates. It is of course possible that, under the terms of the commodity murabaha agreement, NQ may have given security for its deferred payment obligations by granting security over its assets. I do not know. Moreover, NQ’s assets are the shares in the Australian mining subsidiaries, rather than the Australian mines themselves.

Peculiarly, in the 31 December 2019 balance sheet of NQ [See page 22 of the linked accounts.] I could not find the liability for deferred payments due to AW under the commodity murabaha agreement. Accordingly, it is not clear how many of the 2026 certificates were successfully issued. The AW accounts do not help to resolve this, as the most recent published accounts end on 31 July 2019, pre-dating the sukuk issue.