A subsidiary of Saad Group, the Saudi conglomerate immersed in legal action with fellow Saudi group Ahmad Hamad Al Gosaibi and Brothers, announced in a statement on Sunday that it was unable to make regular payments on its Golden Belt 1 sukuk, a Shariah-compliant bond structure.
In contrast to non-Islamic bonds, sukuks do not pay interest, which is forbidden under Islamic rules, but pay regular returns, derived from the underlying assets, to bond holders.
Saad Trading, Contracting & Financial Services said the Golden Belt 1 Sukuk Company was unable to make a scheduled periodic payment on the $650m sukuk, which was issued in 2007 and matures in 2012.
Saad Group is still subject to freezing orders in the Cayman Islands, the UK and Saudi Arabia as a result of a law suit brought forward by AHAB. Saad Group’s subsidiary claimed that “due to matters beyond its control, it is currently impossible for the issuer to perform its payment obligations under the sukuk”.
“Freezing orders in Saudi Arabia and other jurisdictions have rendered impossible the ability of Saad Trading, Contracting & Financial Services to perform its payment obligations under the lease agreement and hence making it impossible for the issuer to pay the certificate holders,” the firm said in a statement.
Sukuk issuance has risen to nearly US$16 billion in 2010, but the Golden Belt 1 default is only one of several in recent months. Sukuks, which are asset-based rather than asset-backed, were hitherto regarded as comparatively safe instruments.
However, the general financial difficulties of Saad and AHAB, who are said to owe creditors between US$10 and US$20 billion, have put a question mark behind bond holders’ ability to recover their initial outlay. The conflicting interests with other creditors and the largely untested process following sukuk defaults add to the uncertainty.
Investors in the sukuk had set up a committee to represent their interest in a potential restructuring as early as July, but the bond holders are divided over whether to give Saad more time or to aggressively seek control of the underlying assets.
Saad meanwhile urged investors to ‘refrain from proceeding with any legal action’ over the default, as it reiterated its commitment to resolving its debt problems.
‘The Saad Group continues to exert every effort through the relevant legal processes to resolve these issues to be able to perform its obligations towards its creditors, including to the issuer and the certificate holders,’ the firm said.