Bankers expect a bumper year of bond sales in Saudi Arabia following the success of the country’s first sovereign-guaranteed sukuk in January.
The 15bn riyal ($4bn) Islamic instrument, issued to finance the expansion of Jeddah’s international airport, was the largest single-tranche sukuk yet, says HSBC, which led the issuance. It was sold at a profit rate of 2.5 per cent and was 3.5 times oversubscribed.
“What we saw in this issuance was extremely good prices, extremely liquid markets and extreme confidence among investors,” says Fahad al-Saif, head of the debt capital markets at HSBC in Saudi Arabia.
Mr al-Saif expects to see at least five big new Islamic bond issuances in the kingdom this year. “Debt capital markets are now definitely an option for Saudi entities looking to diversify their funding,” he says.
The sovereign guarantee helped the 10-year bond be priced at 59 basis points above the 10-year US Treasury, and bankers expect the rate to become the new risk-free benchmark for the Saudi debt market.
“The financial system will take it as a reference point,” says Mr al-Saif, making it easier to price and evaluate future debt. “We expect a record number of issuances.”
The Saudi debt market was largely illiquid at maturities ranging beyond five years, and the new 10-year notes will help in plotting a yield curve for the Saudi riyal, which should also encourage new issuances.
“This is a very positive development. The size is massive and it’s encouraging that they got 10-year money – so the domestic market can provide liquidity and tenor as well,” says Yavar Moini, an executive director at Morgan Stanley in Dubai. “This all bodes well for corporate and non-government-related issuances to the market.”
Saudi borrowers have traditionally relied on bank lending but, if credit conditions remain tight, Mr Moini says more will look to the sukuk market. “Ideally, Saudi would take a leaf out of Malaysia’s book, with its vibrant domestic issuance market,” he says.
For investors, the debt has been assigned a zero per cent risk weighting by the Saudi Arabian Monetary Agency, meaning it can be held as an investment but also used as collateral to tap liquidity from the Saudi central bank.
While the sukuk broke records both in the Saudi market and the Islamic finance industry, it was also the largest sovereign-guaranteed emerging-market debt issuance in a decade, HSBC said.
The Saudi government has been gradually moving to develop its capital markets as the state embarks on a $130bn spending programme, announced in 2011.
In January, its capital markets regulator announced that foreign companies listed on other regulated exchanges overseas would be allowed to list their shares on the Saudi bourse, the largest in the Arab world. The market remains closed to foreign investors, who can currently only buy stocks through unpopular swap agreements with Saudi-based intermediaries.
But that too may soon change, with growing speculation that direct foreign ownership of Saudi stocks will be permitted at some point this year, with the authorities conducting test trades and holding discussions with brokerages and asset managers.
source: Financial Times