Norton Rose’s political investment pays off with Treasury Islamic bond

<a class=Norton Rose’s political investment pays off with Treasury Islamic bond” />Advising HM Treasury on its first-ever Islamic bond issue is a choice mandate. For Norton Rose, besting Allen & Overy (A&O) and Denton Wilde Sapte makes the win even sweeter.

Norton Rose’s Islamic finance practice was almost a shoo-in for the role after the firm put in significant pro bono time and was last year the only one to be appointed alongside dozens of banks and other groups to the Islamic Finance Experts Group (IFEG) (The Lawyer, 30 April 2007).

Since then the firm’s Islamic finance head Neil Miller has remained close to the Treasury and was by its side at the August 2007 meeting of the IFEG, which first examined the feasibility of a UK government sukuk.

Norton Rose’s Islamic finance practice is well regarded in the market and last year won the Debt Capital Markets and Structured Finance Team of the Year Award at The Lawyer Awards.

Despite this it has had to work hard to make up for numerous partner losses, including Dubai managing partner Graeme Muir, who left to become a consultant, and partners Nadim Kahn and Zubair Mir, both of whom joined Herbert Smith.

While the practice has also made some key hires since suffering these losses – most notably Farmida Bi from Dentons – there is still a ­perception that perhaps the firm does not have the same level of sukuk experience as its rivals’.

One Islamic finance partner explains how his pitch to the Treasury would run if he were at Norton Rose. “I’d have stressed very strongly our longstanding Islamic finance credentials and make a play on being an Islamic finance expert, without drilling down and admitting that we weren’t sukuk experts,” he says.

Clearly, any statement from a rival firm must be taken with at least a little pinch of salt, but it is fair to say that Norton Rose’s ambition of advising on the ­Treasury sukuk was certainly helped by the fact that Clifford Chance dropped out of the race.

Like Norton Rose, the magic circle firm has been careful to stay close to those in power, making sure it was well represented on a number of IFEG subcommittees covering areas such as tax, ­standardisation and regulation.

But Clifford Chance is not represented on the Office of Government Commerce Catalist super-panel of 48 firms and was therefore ­ineligible to pitch for the Treasury’s sukuk – unlike A&O, Dentons and Norton Rose.

One Clifford Chance partner explains that the firm’s absence from the Catalist panel is a ­“technical oversight” that is ­difficult to remedy. That said, ­Clifford Chance is understood to be pushing strongly to line itself up as counsel to the Treasury’s ­underwriter on the sukuk.

While the existence of the underwriter mandate will depend on the eventual structure of the Islamic bond, it is understood that A&O is also interested in the ­mandate, having missed out on the flagship role by not chumming it enough with the Government.

Observers expect that the big UK banks will line up for the underwriter role, although one partner points out that the ­nationalised banks could be out of the picture – it is unlikely that the Government would risk underwriting its own Islamic bond with the banks it owns.

In terms of acting for Islamic banks and sovereign sukuk issues, there is little to tell Clifford Chance’s and A&O’s practices apart in terms of experience (see box). But apart from its IFEG participation, another ace up Clifford Chance’s sleeve could tip the ­balance: the firm’s senior partner Stuart Popham is known to be close to Gordon Brown’s government, having accompanied the Prime Minister to China and India earlier this year.

However, as Clifford Chance capital markets partner Simon Sinclair says, the usual firm-client relationships do not necessarily apply in this field.
“Islamic finance is more niche,” notes Sinclair. “I’m not sure it will be a usual contact situation.”

With this in mind, it is ­conceivable that second-tier Islamic finance outfits such as Ashurst, Dentons, Linklaters or Lovells could also be in with a fighting chance of winning the underwriter mandate.

Ashurst’s practice is looking strong following the hire of Dechert sukuk expert Abradat Kamalpour earlier this year. And although Dentons is yet to recover from the loss of Bi, its practice is still well regarded. Lovells, which last year built a team from scratch by poaching Dentons’ entire Dubai sharia team, still lacks serious Islamic finance capacity in London.

Even if these are only outside bets for the main deal, all ­international London firms active in the field are likely to benefit from the Treasury’s move: once sukuk issuance is seen as part of the mainstream, corporates will likely begin to look more closely at the vehicles.

Unsurprisingly, therefore, these firms are united in their praise of the Treasury.

Kamalpour at Ashurst says:
“It’s a very positive step by the ­Government and in the process they’ll probably have to change some laws, which others looking to tap the Islamic bond market can also take the benefit of.”
At Lovells, Islamic finance head Rahail Ali adds: “A government sukuk is one of the best ways of showing investors how attractive the Islamic finance regime can be. It’s like a peacock, if you will.”

The exact timetable for the Treasury’s sukuk is still not clear, but the expectation is that it will be issued by the second quarter of 2009. Provided the UK manages to pip other countries to the post as the first major non-Muslim ­sovereign issuer, its reputation as the most Islamic finance-friendly centre outside the Middle East will be sealed.

And if European and US ­corporates begin to issue Islamic bonds, this will ultimately provide rich pickings for London firms and their lawyers.

UK sukuk explained

The UK’s sukuk is anticipated to be ­structured as the ­widely accepted ijara sukuk, a structure that is similar to a sale-and-leaseback structure. Assets, such as real estate owned by the ­Government, are sold to a vehicle ­company on trust for investors. The vehicle issues sharia-compliant notes to investors and leases the property back to the Government, with those rental proceeds paid out to investors. At expiry of the sukuk the Government buys back the property and the vehicle repays investors.

The first such deal was pioneered by the Malaysian government in 2002. This was emulated in Pakistan in 2005, with Clifford Chance acting for the Pakistani government and Allen & Overy for the joint lead underwriters Citigroup Global Markets and HSBC.

The two firms have since been involved in a large number of sovereign sukuk issues, although Norton Rose and others have caught a fair share too.