The GCC’s top utilities provider just signed a deal that will deliver one of the Gulf’s biggest ever infrastructural improvements. It was made possible thanks to a surge in demand for Islamic securities
In June, the Saudi Electricity Company closed one of the country’s biggest deals of the year so far. One of the Gulf’s top utilities providers signed an agreement with various national firms worth SAR6.3bn that will see the region’s infrastructure completely overhauled with new, state-of-the-art cables for its power distribution network.
According to CEO Ali bin Saleh Al-Barrak, the deal should connect more than 420,000 new homes per year to the national grid. With electricity demand in Saudi Arabia increasing by eight percent each year, the upgrades in infrastructure will be a valued addition to the SAR21.8bn in infrastructure improvements the SEC has already made over the last 12 months. In order to fund these pricey upgrades, Al-Barrak and his firm (like many in the region) have turned to sukuk bonds.
Not only has the SEC’s strong credit rating brought in major loan investment – most notably from the Export-Import Bank of Korea – but it’s also been able to raise SAR6.6bn in capital by issuing a sukuk. As Western bonds are not compatible with sharia law, the Islamic equivalent sees issuers sell a share in some form of tangible asset (rather than debt) to investors. Popularity is surging across the globe. Investors love that yields on sukuk bonds tend to stay comfortably low, while conventional bond yields continue to fluctuate dramatically. In the long term, it appears sukuk bonds may be a safer purchase for investors. They’re also a better way for Middle Eastern firms to fund their increasingly ambitious development projects, as risk is split evenly between firms and investors. US banks like Goldman Sachs, Citigroup and Morgan Stanley are racing to accommodate sales. Last year, global sales of sukuk bonds reached a record $46.5bn, while Islamic financial assets grew to $1.4bn. By 2015, Standard and Poor’s expects that figure to double, reaching almost $3trn.
For companies like the SEC, the healthy surge in global demand for Islamic financial assets has brought in otherwise non-existent international funding for its local development projects. In April, the firm was able to raise a whopping $1.75bn in a single, dual-tranche sukuk issue.
“The sukuk issue is important to us for strengthening our funding mix, accessing longer-tenor financing, broadening our investor base and helping us become more in line with our global peers while supporting SEC’s capital expenditure requirements,” said Al-Barrak. “We are very pleased with the results of our sukuk issuance and feel that the large orderbook is a positive reflection of the market’s confidence in both Saudi Arabia and the SEC.”
The transaction, which was sponsored by Deutsche Bank and HSBC, was the biggest ever international debt capital markets issuance to come out of Saudi Arabia. Now, the capital raised from the issuance is being reinvested into local development projects that will improve the lives of the Gulf’s everyday citizens. The company’s latest deal, which will see SAR6.3bn in high power cables completely overhaul the Saudi power grid, is just one of many SEC projects aimed at redeveloping the region.
Meanwhile, other GCC companies have taken notice of the SEC’s success and followed suit. Earlier this year, Dubai Electricity and Water Authority made $5bn in bids for just $1bn of Islamic bonds. In June, the IDB secured $1.5bn in bids for its $1bn issuance of securities. As momentum continues to build, it’s little wonder sukuk bonds overtook conventional bonds last year to become the Gulf region’s premier financial tool.
“The Islamic industry is growing faster than conventional [bonds], so every financial institution is looking at it,” says CEO of Standard Chartered Saaqiq, Afaq Khan. “If clients are demanding sharia-compliant solutions, you must develop accordingly.”