Saxony-Anhalt sells one big benchmark bond issue each year, and the eastern German state has become known for its innovation -- it was, for instance, the first German public borrower to issue bonds convertible into euros before the launch of monetary union. But last month Saxony-Anhalt topped itself, venturing into new territory both literally and figuratively. Edgar Kresin, the state’s enterprising 33-year-old treasurer, came out with a E100 million ($121 million) issue of sukuks, Islamic securities that act much like bonds but scrupulously avoid paying interest, which is prohibited under shari’a, or Islamic law.
For this deal -- the first of its kind by a European borrower -- Saxony-Anhalt sold real estate assets to a Dutch-based special-purpose vehicle, then leased them back. The intermediary in the Netherlands collected the issue’s proceeds for Saxony-Anhalt and will distribute the state’s lease payments to sukuk holders.
Bankers at lead manager Citigroup say the effective cost of the issue, which was due to be priced late last month, is expected to be competitive with Saxony-Anhalt’s rate on conventional floating-rate debt.
Kresin, who has traveled on road shows to sell his state’s bonds in Asia since the late 1990s, sees his effort to globalize Saxony-Anhalt’s base of investors as an excellent way to raise awareness of the region.
“Saxony-Anhalt isn’t as well known as Bavaria,” he explains. “We believe our name recognition in Europe as well as in Arabic countries will increase with innovative instruments.”
But they must be culturally correct, as Kresin learned to his chagrin three years ago: He toured the Gulf region trying to drum up interest in a conventional, interest-bearing E1 billion bond but found few takers among Muslim investors.
