Morgan to offer Islamic bond

Morgan Stanley said Wednesday that it planned to bring to market what it believed would be the first sale of an Islamic bond by a multinational corporation.

The bond sale is being coordinated by Morgan Stanley’s Dubai office. Hugh Fraser, a spokesman for Morgan Stanley in London, declined to identify the corporation.

The offering, which could take place this quarter, comes as multinational corporations are experiencing difficulties in U.S. corporate debt markets because of the ripple effects of the sub-prime mortgage crisis. This has left corporate borrowers eager to find fresh sources of funds, particularly in the wealthy Persian 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, as well as investment in businesses linked to alcohol and gambling.

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

HSBC Holdings 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.

However, the newness and rapid expansion of the market have raised some concerns because its institutions and structures are largely untested. 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.