Saudi firms may launch 10 Islamic bonds, or sukuk, in 2011, more than double their number this year, but they will be dominated by private placements, a specialist at Saudi Hollandi Bank said on Monday.
"The market confidence is coming back ... We should probably see two or three (sukuk issues) every quarter over the next year ... Ten more issues coming in 2011," Haroon Nisar, senior manager for Islamic banking at the Royal Bank of Scotland affiliate told the Reuters Middle East Summit in Riyadh.
Key factors that will spur demand for Saudi sukuk issues will be a low interest rate environment in Saudi and Dubai World's restructuring accord with 99 percent of its bank lenders as well as Dubai's successful $1.25 billion conventional bond issue in late September.
"Previously, people were holding most of their investments in cash and generally now they feel they have to go back in business because of really low interest rates, it's very difficult to keep cash," Nisar said.
"There is a lot of money around looking for good assets ... The renewed interest from the issuers' aspect is there," he said.
Saudi Arabia has had four sukuk issues this year so far, Nisar said, but declined to comment on the expected size of issues and only cited Jeddah-based Islamic Development Bank (IDB) and an Aramco-Total joint-venture as being among the prospective issuers.
MOSTLY PRIVATE PLACEMENTS
Nisar said, however, that the majority of the other eight issues expected next year will have short-term maturities amid a preference for private placements.
"Private placements is relatively easy to do, there is less disclosure for companies," he said.
The interest rate environment in Saudi Arabia -- the main repo interest rate stands at 2 percent -- might seem discouraging for prospective sukuk buyers.
"But investors do not have any option," he said. "That's why the best option is coming with shorter-term instruments where you don't have to lock yourself in for three years or five years, so coming in with the commercial paper segment in the sukuk market.
"That is the best way for this (sukuk) market to grow," Nisar said.
As an example he cited the sale in July of a nine-month corporate Islamic bond by contracting firm Saudi Binladin Group.
To enliven the kingdom's secondary bond and sukuk trade platform a sovereign bond issue would be helpful though he saw no indication this would happen.
Saudi Arabia launched in the summer of 2009 a secondary market to trade bonds and sukuk but activity has been sluggish.
"We don't have enough market makers," said Omar al-Jaroudi, chief executive of Shuaa Capital Saudi Arabia.
"We don't see much activity. It's still a market that needs to be developed to be honest," he said.