The Wall Street Journal: Brunei LNG to Offer Nation's First Islamic Bonds: "Brunei's government owns half of Brunei LNG. The other half is divided evenly between Royal Dutch Shell PLC, of the Netherlands, and Japan's Mitsubishi Corp.": Tuesday 4 October 2005

SINGAPORE -- Brunei LNG Sdn. Bhd. is preparing to sell the sultanate's first bonds that comply with Shariah, the legal code of Islam, adding another country to the list of those lured by a surge of international interest in Islamic debt.

The supplier of liquefied natural gas has chosen Islamic Development Bank of Brunei to help it raise the equivalent of US$59 million with an offering of six-year paper set to price in December.

Islamic bonds, often called sukuks, have become increasingly important as an asset class in Asia and the Middle East, as investors seek alternatives to low-yielding investments like savings accounts. Backed by tangible goods such as property or by income-generating activities, the bonds make payouts based on the assets rather than paying interest, which is banned under Islamic law.

"In support of the effort to promote [Brunei] as a significant center for Islamic finance, Brunei LNG has decided to go into an Islamic bond rather than a conventional bond," said Ali Matarsat, finance manager for the energy firm. "This first sukuk is meant to be a model for other Bruneian entities to replicate."

Brunei's government owns half of Brunei LNG. The other half is divided evenly between Royal Dutch Shell PLC, of the Netherlands, and Japan's Mitsubishi Corp.

Brunei LNG will use the proceeds to help finance a major upgrade of its only LNG plant. The company has two long-term supply contracts -- one with Japan, the world's largest importer of LNG, and the other with South Korea, a growing user of the fuel, which is becoming an important alternative to crude oil.

With Brunei LNG keen to take receipt of the funds before year end, roadshows for the offering, which has approval from IDBB's Shariah board, are tentatively scheduled for the first two weeks of December.

Brunei's push to develop its Islamic bond market comes as the sultanate tries to develop its economy beyond oil and gas, which make up nearly half of its gross domestic product. To do that, the 5,770-square-kilometer enclave on the island of Borneo, which it shares with Malaysia and Indonesia, is turning to tourism and banking.

With two-thirds of its population practicing Islam and two other large Muslim nations nearby, Islamic banking seems a natural fit. However, Brunei will have to compete with Kuala Lumpur and Singapore, which already are vying to be the Islamic finance center of Asia.

The deal will be backed by leases on a cryogenic heat exchanger, a piece of equipment used to cool natural gas into liquid form. Brunei LNG will sell the equipment to a special-purpose vehicle called IDBB Sukuk Inc. and lease it back. The vehicle will then issue certificates to IDBB, which will sell them to investors who will get a payout funded by the machinery lease. Brunei LNG will buy the equipment back when the bonds mature.

Brunei LNG said no ratings are needed because the issue will be a local offering. The country isn't ranked by Moody's or Standard & Poor's.

Write to Karen Lane at karen.lane@dowjones.com