Britain's first Islamic bond draws bumper demand

By David Milliken

LONDON (Reuters) - Britain became the first Western country to sell an Islamic bond on Wednesday, drawing orders of more than 2 billion pounds - over 10 times the planned issue amount.

The five-year sukuk issue, intended to raise 200 million pounds, is being launched by the government as part of an effort to boost London's position as a centre for Islamic finance.

It will be priced later on Wednesday at a yield matching that of Britain's benchmark five-year government bond, or gilt , one of the bookrunners for the syndication said. That is less than the premium of up to 2 basis points over the conventional bond initially indicated, reflecting bumper demand.

Despite the strong investor interest, Wednesday's sale may not open the door for further sukuk issuance.

Robert Stheeman, chief executive of the UK Debt Management Office, told Reuters that it had been hard to find suitable assets to structure the issue, which does not pay interest in the same way as a conventional bond.

"At this stage it's planned just to be a one-off," Stheeman said. "It has not proven easy to find sufficient assets either for bigger size or for a programme of issuance. But we are pleased with the result."

Earlier in the day, speaking at a Euromoney conference, Stheeman described the bond sale as an essentially political decision and not as a way to meet core British funding needs.

The strong demand belies concern from some analysts that the low yield for the 2019 sukuk of just over 2 percent, and the use of sterling, might dampen its appeal to overseas investors, who are used to higher yields and other currencies.

Analysts will also be looking to see how much of the bond goes to Islamic banks operating in Britain, for whom this is a rare chance to buy sterling-denominated sukuk assets.

"A modest 200 million pound sukuk issuance really doesn't move the dial in terms of the $60-65 billion in global sukuk issuance expected this year," said Khalid Howladar, Moody's global head of Islamic finance.

"Demand for high credit quality sukuk in the triple-A and double-A space far exceeds supply, particularly among the fast growing Islamic banks who need an increasing amount of high grade assets to address forthcoming Basel III liquidity requirements."

British bank HSBC (L:HSBA) structured the deal, and acted as a bookrunner alongside Qatar's Barwa Bank, Malaysia's CIMB (KL:CIMB), National Bank of Abu Dhabi and Standard Chartered (L:STAN).

(Additinal reporting by Archana Narayanan, Ana Nicolaci da Costa and Andy Bruce; Editing by Catherine Evans)