Morgan Stanley plans Islamic bonds

Morgan Stanley plans to bring to market what it believes will be the first sale of an Islamic bond by a multinational corporation, a spokesman for the firm said Wednesday.

The offering could take place this quarter and comes as multinational corporations are experiencing difficulties in US corporate debt markets due to the ripple effects of the subprime crisis. This has left corporate borrowers eager to find fresh sources of funds, particularly in the wealthy Gulf states.

Islamic bonds are known as sukuk and generally are structured as profit-sharing plans so that the bondholder’s income resembles a rent payment. Islamic Sharia law forbids the use and payment of interest, and investment in businesses linked to alcohol and gambling.

The Islamic bond market was born just five years ago in Malaysia. It has thrived since then, spreading throughout Asia, the Middle East and Europe. Encore, a Swiss asset management company, has estimated the size of the sukuk market at $50 billion in 2007. A somewhat parallel market for Islamic mortgages has sprung up in the UK and elsewhere in Europe.

HSBC Holdings PLC has been among the most active underwriters of sukuk. The bank’s HSBC Amanan Islamic finance division has brought bonds to market on behalf of the governments of Pakistan, Malaysia and Qatar.

The newness and rapid expansion of the market has raised some concerns as its institutions and structures are largely untested, however. To date there have been few publicized defaults and it is not known how the Islamic bond market would cope if a large number of issuers failed to make their payments. (AP)