With debt markets gingerly reopening, Gulf companies eager to raise cash through issuing bonds have to make a decision: should they issue conventional or Islamic bonds, known as sukuk?
The SR7bn ($1.9bn) sukuk issued by Saudi Electricity Company, the kingdom’s state power utility, this summer could be a useful indicator.
Investors flocked to it, rewarding the company with a price of 160 basis points above the Saudi interbank offered rate. A large part of the attraction was the creditworthiness of SEC. “The company keeps the lights on, and, more importantly in Saudi Arabia, the air-conditioning working,” quips Rajiv Shukla, head of debt capital markets at HSBC Middle East, who led the issue.
Yet the SEC sukuk also benefited from a glut of local capital seeking investments that comply with sharia Islamic law. Saudi banks, all of which in theory operate according to Islamic principles, have as much as SR150bn sitting in the central bank, says Shukla, where the funds earn virtually no returns. Demand for fresh Islamic debt is therefore healthy, bankers say.
“The sukuk market has seen very little issuance recently, and a lot of Islamic banks are still awash with capital,” says Nish Popat, regional head of fixed income at ING Investment Management. “The success of the SEC sukuk shows how cash-rich the Saudi banks are now.”
After exploding in popularity during the past half-decade, the sukuk market was last year hurt by doubts over the Islamic compliance of several structures, and the credit crunch depressed demand for all forms of debt.
But like its conventional counterpart, the sukuk market has begun to show signs of thawing. Indonesia, Bahrain, Ras Al Khaimah and Malaysia have all tapped it recently. All the Islamic bonds were oversubscribed, and yields have tightened further as global financial sentiment has improved.
Ras Al Khaimah Investment Authority’s $400m, 8 percent coupon sukuk now trades at a yield of 7.15 percent, and Bahrain’s $750m, 6.25 percent central bank sukuk now yields 5.15 percent.
Yet while bankers say there is plenty of appetite for Islamic issuance at sharia financial institutions, issuers should not expect to pay less for an Islamic bond than they would for a conventional one.
SEC’s sukuk was a success because it was a local currency bond. “International markets are more expensive than local markets, and dollar liquidity is more expensive than local currencies,” says an Islamic banker. Institutional investors are also eager to see how the restructuring of sukuk issued by Kuwait’s The Investment Dar and Saudi Arabia’s Saad Group - both of which have recently defaulted - are resolved. “It could set an important standard for sukuk settlement,” says Popat.
Trading of Islamic debt also remains a marginal pursuit. Saudi Arabia launched an electronic sukuk market in June, but since then only five securities have been listed and only 10 trades made.
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