Tighter funding in Europe is pushing Middle East issuers to tap the still-liquid Islamic finance markets for funds. Two regional banks have sold Islamic bonds, or sukuk, this week.
Dubai-based Emirates Islamic Bank issued a $500 million, five-year Islamic bond with a yield of 4.718%, while Abu Dhabi-based First Gulf Bank sold a $500 million, five-year sukuk with a yield of 4.046%.
In addition, Saudi Arabia's General Authority of Civil Aviation said it plans to issue a government-guaranteed sukuk to pay for a new terminal at Jeddah airport, and Dubai-based Islamic mortgage company Tamweel announced on Thursday a five-year, $300 million sukuk.
Bankers said sukuk investors can borrow at relatively attractive rates, given the troubles in the euro zone that are curtailing the availability of funding from European banks. They are advising borrowers not to wait, in case political conditions in the region worsen or traditional sources of bank financing become even scarcer.
"Our message is: guys, do it, the window is good. It is as good an environment we can get given the global environment, given the euro-zone environment," said Georges Elhedery, head of global markets for Middle East and North Africa at HSBC.
Issuers of Islamic bonds can still draw on a relatively plentiful pool of liquidity earmarked for Islamic finance, according to bankers.
"Sukuk issuers in 2011 and 2012 are taking advantage of the intact regional Islamic liquidity pool, which has remained relatively untapped over the past couple of years following the 2008-2009 financial crisis," said Raphael de Ricaud, head of Islamic Finance at Rothschild. "The traditional providers of liquidity for regional banks on the interbank market have been battered by the sovereign-debt crisis in Europe, forcing them to look for alternative sources of financing such as Islamic finance."
Reflecting the improved liquidity, the yield of HSBC-Nasdaq Dubai's Gulf sukuk index has fallen to 4.5% from around 6% last March, when concerns over the Arab Spring uprisings were pushing up risk premiums.
Sukuk find ready buyers among Middle East investors who follow Islamic principles and can participate only in Shariah-compliant instruments. But many non-Islamic investors are also keen to participate. For example, the allocation of the Emirates Islamic Bank sukuk was 57% to Middle Eastern investors; the rest went to buyers in Asia and Europe.
"Sukuk provides diversity of funding by tapping into the substantial liquidity pool available with Islamic investors, and at the same time is also acceptable to the regular conventional investors. So it maximizes the liquidity pool, thereby providing better certainty of execution and pricing in these uncertain times," said Afaq Khan, chief executive of Islamic Banking at Standard Chartered Bank. "Even the conventional investors in Europe prefer a sukuk offering by a regional issuer, since they know there will be a ready bid from the regional Islamic investors in case of market turmoil."
Last year, the Gulf region saw 29 Islamic bond issues with a total value of nearly $19 billion, up from eight issues worth about $6 billion in 2010, according to Zawya.com data.
Dubai-based Majid Al Futtaim recently set up a $1 billion Islamic bond program, while Doha Bank, Bahrain's Al Baraka Banking Group, Emirates Telecommunications Co. of the United Arab Emirates and Abu Dhabi National Energy Co., among others, could all be looking to issue Islamic debt this year.
"A good pipeline of sukuk issuances has built up for 2012, and we are seeing several issuances being lined up in regular issuer markets such as the U.A.E. and Malaysia, as well as in newer markets in Asia Pacific, Central Asia and Africa," said Muneer Khan, partner and head of Islamic finance at the international law firm Simmons & Simmons.
Source: The Wall Street Journal