Saudi Arabian real estate and energy companies are leading Islamic bond sales from the Persian Gulf as the kingdom’s $400 billion stimulus plan, the biggest among the Group of 20 nations, boosts spending.
Sukuk from borrowers in the largest Arab economy may more than double to $4.5 billion this year from $2.1 billion in 2009, as a “scarcity” of local notes that comply with the religion’s ban on interest bolsters demand from local banks, according to Riyadh-based HSBC Saudi Arabia Ltd.
Saudi Arabia, the world’s largest oil supplier, announced the five-year plan in 2008 to spur economic growth and finance construction projects. Saudi Finance Minister Ibrahim al-Assaf said on Feb. 11 that gross domestic product may increase more than 4 percent in 2010, compared with 0.6 percent last year.
“There’s going to be a reasonable amount of sukuk supply this year,” Rajiv Shukla, managing director and head of global capital finance at HSBC Saudi Arabia in Riyadh, a unit of HSBC Holdings Plc, said in an interview yesterday. “Saudi Arabia has been a steady supplier."
Saudi Electricity Co., the Arab world’s largest utility, and Dar Al Arkan Real Estate Development Co., the biggest Saudi developer by market value, led sales of the bonds so far in 2010, according to data compiled by Bloomberg. Saudi Arabia is rated Aa3 by Moody’s Investors Service and AA- by Standard & Poor’s, the fourth-highest rankings.
The average yield on sukuk sold by Gulf Cooperation Council issuers fell 17 basis points to 6.77 percent on July 30, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. It’s still up from the year’s low of 6.6 percent on April 15.
State-controlled Saudi Electricity sold 7 billion riyals ($1.9 billion) of 20-year Islamic bonds in May at 95 basis points more than the three-month Saudi riyal interbank offered rate. That compares with a spread of 160 basis points on 7 billion riyals of similar-maturity debt in June 2009. The company may issue sukuk overseas in 2011, Executive Director of Treasury Fahad Alsudairy said on May 18.
“The new sales will entirely or almost entirely be riyal- denominated,” said Shukla at the unit of Europe’s largest lender. “Local Saudi banks are very flush with riyals and there has been scarcity of riyal-denominated paper.”
Banks tightened rules for lending after Saad Group, the business owned by Saudi billionaire Maan al-Sanea, and Ahmad Hamad Al-Gosaibi & Brothers Co. defaulted on loans last year after borrowing at least $15.7 billion from about 80 banks. Dubai World said in November it was seeking to renegotiate liabilities.
Sales of Islamic notes from companies in the Gulf have dropped 24 percent to $2.5 billion so far in 2010, the lowest level since 2005, data compiled by Bloomberg show. Twenty-six companies from Malaysia raised 9.6 billion ringgit ($3 billion) from sukuk sales in the period, according to the data. Islamic debt is typically backed by assets or cash flows because of Shariah law’s ban on interest.
National Bank of Abu Dhabi PJSC, the United Arab Emirates’ second-largest lender by assets, sold 500 million ringgit in the only Islamic debt offering from the emirate this year.
“It may not be easy for Gulf countries to lead sukuk issuance because real estate, the most trusted underlying asset for sukuk, is in crisis in the region,” Pervez Said, chief executive officer of Dawood Islamic Bank Ltd., said in an interview in Karachi on July 30. “The underlying asset for a sukuk must have credibility and when the real estate has lost its value, investors will be reluctant to buy the bond.”
Dubai World, which is renegotiating terms on $23.5 billion of liabilities, said on July 22 it expects to complete the agreement in “coming months.” Property unit Nakheel PJSC, which held a separate meeting with its lenders July 14, said a group of creditors representing banks “unanimously supported” a proposal on terms of $10.5 billion of loans and unpaid bills.
The yield on the Dubai Department of Finance’s 6.396 percent sukuk due in November 2014 fell 20 basis points to 7.17 percent on July 30, according to data compiled by Bloomberg. The difference over similar-maturity U.S. Treasuries has widened to 582 basis points from 406 when the debt was sold in October.
The difference in yield between the Dubai bonds and the Malaysian government’s 3.928 percent Islamic note due June 2015 has widened 41 basis points since May 31 to 415 basis points, according to data compiled by Bloomberg.
Saudi Binladin Group issued a 700 million riyal sukuk last month through a private placement to Saudi investors as the Jeddah-based company expands, lead manager HSBC Saudi Arabia said on July 17.
“There is liquidity in the system both from the institutional side to large companies that want to place their cash in Islamic paper,” John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh, said yesterday. “The supply is coming from capital investments the kingdom is undertaking.”