University Bancorp in Ann Arbor, Mich., has raised $2.5 million through a debt offering that can be described as anything but routine.
The $182 million-asset University this month issued a Tier 1 participatory note certificate that complies with religious traditions that prohibit the charging of interest or guard against usury.
The 5.75% note is perpetual and does not carry a maturity date. The value of the note is tied to a bank portfolio of assets and loans, and the investors in the note share in the portfolio’s profits; if the bank's profit for a given time period exceeds 5.75%, the excess will be held in a reserve account to be disbursed to investors when profit falls below 5.75%.
University's primary adviser on the offering, the law firm Linklaters, called it the first sukuk issued under U.S. law. A sukuk is an Arabic financial certificate, meaning that it is compliant with the Islamic law Sharia.
Stephen Lange Ranzini, University's chief executive, said the note offering has even broader implications than being compliant with Islamic law. The debt is also said to comply with other religious belief systems, including Orthodox Judaism, Hinduism and Catholic canon law.
The debt meets these religious standards because it does not pay interest. Instead, it is merely a profit-sharing instrument, Ranzini said.
It's more like "equity with a dividend that varies," Ranzini said.
The $2.5 million note was purchased by an institutional investor in the U.S. whom Ranzini declined to identify. Ranzini also declined to say if the investor had specific religious requirements.
However, the investor liked the innovative capital structure and it met the firm's need for ethical, socially responsible investments, Ranzini said.
Ranzini said it is simply a superior way to issue debt as opposed to, say, subordinated notes and was not created solely for religious reasons.
Linklaters, University's legal counsel, declined to comment.
University plans to use the proceeds to buttress its capital levels, specifically increasing its Tier 1 capital by about 18%. The bank needed to boost capital, because Basel III regulations forced community banks to devalue their holdings of mortgage-servicing rights, Ranzini said.
"If it had not been for Basel III, we would not have issued these notes," Ranzini said.
University did not use a financial adviser on the debt offering. Ranzini approached Linklaters for legal advice, because it has advised on several other Islamic-compliant debt issuances.