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Monday, 6 July 2009

Strong Saudi sukuk marks turning point


Saudi Electricity Co's (SEC) oversubscribed 7 billion Saudi riyal ($1.87 billion) sukuk late last month could mark a turning point for Islamic debt markets, with more issues likely to follow later this year, a senior HSBC Holdings (HBC) official said on Sunday.

"There is a solid pipeline of potential issues, and we should see more in the second half of this year," Rajiv Shukla, head of debt capital markets for the Middle East and North Africa at HSBC, the lead arranger on the Islamic bond, told news agency Zawya Dow Jones in an interview on Sunday.

Saudi Electricity, the Middle East's largest utility, in June successfully closed its sukuk after the final order book exceeded 20 billion riyals, Riyadh-based Shukla said, adding that institutional investors in Saudi Arabia bought up the entire Islamic bond.

Banks in the kingdom were the largest subscribers, Shukla said, as they seek alternatives to parking their cash after the Saudi Arabian Monetary Agency, the kingdom's central bank, slashed the reverse repo rate - the interest paid to commercial banks on deposits - down to 25 basis points.

But Shukla said banks would face the steepest scale-downs when the sukuk is allocated and would receive only about half the issue, with the rest going to pension funds, government investment firms and insurance companies.

The sukuk, which was priced at 160 basis points over the three-month Saudi interbank offered rate (Saibor) is SEC's second after it raised 7 billion riyals in 2007, priced at 45 basis points above Saibor.

Although the premium has increased, the pricing for issuers is attractive and could be a catalyst for other offerings.

"The money they are getting today in aggregate coupon terms is much cheaper compared to the 2007 issue," Shukla said.

Saudi Arabia, along with other states in the oil-rich Persian Gulf, has been encouraging companies to look at debt markets to raise capital as other forms of financing have dried up.

So far this year, debt issues have been on the decline. Global issuance of Islamic bonds tumbled 37 percent in the first quarter of the year.

The primary sukuk market dropped to $1.8 billion in the first three months of 2009 compared with $2.84 billion in the same period last year, according to data compiled by the Zawya Sukuk Monitor. But the tide may be turning, at least for government-supported companies.

Investors in the kingdom have become increasingly skittish, and international players are unlikely to increase their exposure to the Gulf until the uncertainty over the finances of family conglomerates and overextended sovereigns is abated.

However, one way to alleviate some of these concerns is for issuers to get ratings. "Investors in the region, especially after the collapse of Lehman Brothers, are demanding rated issues," Shukla said, adding that SEC was rated at the "sovereign ceiling" by the three main agencies.

Saudi stock market-listed SEC is considered a quasi-sovereign issuer because it is partly owned by the oil-rich kingdom's government, which holds a stake of just above 74 percent in the utility.

As other issuers look at SEC's experience, Shukla said, confidence is expected to trickle back into the market, both in Saudi Arabia and across the world of Islamic finance

(Maktoob Debt Business)
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Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
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