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Sluggish GCC pulls itself from the doldrums

By Paul McNamara The GCC Sukuk market was once the darling of the industry until both the global financial crisis and then the spreading malaise of political unrest across the MENA made the whole region look shaky.

But there are growing signs that the GCC Sukuk market might be about to rise like a phoenix from the ashes if current activity and rumour is anything to go by.

Stephen de Stadler, MD of Fitch Ratings in the Middle East told The Islamic Globe: "The market is learning that diversification of funding base , namely accessing debt capital markets and not merely relying on the equity and banking sector, can be key to ensuring that the effects of global or regional crisis' are mitigated."

It is hard to say where the recovery started first but the Bank Al Jazira SR1bn ($274m) Sukuk that is currently making the headlines is certainly an interesting starting point. The issue was originally pencilled in at SR750m ($205m) but was increased because of the sheer demand. According to data released by Clifford Chance , who worked on the deal, total orders for the issue topped SR4bn ($1.1bn).

The Sukuk is a hybrid Mudarabah/Murabahah structure and represents the first Sukuk by a fully Shari'ah compliant Saudi bank, as well as the first debt capital markets transaction of 2011 in Saudi Arabia. HSBC Saudi Arabia and JP Morgan Saudi Arabia were Joint Lead Managers on the transaction.

Debashis Dey, head of capital markets Middle East for Clifford Chance told The Islamic Globe: "Saudi banks do their structuring depending on their asset base. Jazira looked at what assets it had and balanced these with what investors perceived as risk. This is how we came to the Mudarabah/Murabahah hybrid structure that allowed the investor exposure to the overall general risk of the bank, not just its selected assets."

Are global investors once again looking at the GCC Sukuk market with interest? In the case of Al Jazira , international investors were not the target as the issue was priced in local currency and aimed at a domestic, or at best a regional, audience. Dey confirmed that: "Predominantly the subscribers were Saudi, including government and institutional investors, as well as other Saudi banks."

However, the headline-grabbing effect of a $1bn Sukuk is sure to outweigh that of a SR1bn Sukuk and it is here that Masraf Al Rayan pips Al Jazira to the post since the Qatari bank has received board approval to go to the market with a $1bn offering, although in fairness it is possible that this much debated issue will be a Medium Term Note programme rather than a straightforward Sukuk.

There is some suggestion that this issue may be denominated in euros rather than dollars but this might have more to do with lack of faith in the greenback than having eyes on the European market. Little else is known about this issue and the bank made the rather unhelpful statement: "Management have chosen not to disclose any information regarding the Sukuk as of yet," when The Islamic Globe contacted it to investigate further.

Qatari neighbours QIIB have also indicated that they intend to tap the Islamic debt capital markets this year again with a whopping $700m 5-year convertible Sukuk which, sources suggest, could come to market before the summer heat begins to cripple activity in the Gulf.

The Saudi market is also due a fourth issue from Saudi Electricity Company although no indication has been given on the size or the timing of the issue - and indeed there is an element of guesswork that the issue will even be a Sukuk rather than a conventional bond issue. Back in May last year Ahmed al-Jogaiman, executive vice president for finance for the company indicated, "We are soon going to tap the international markets. It might not be this year, maybe beginning of next year. Our next step would be to issue an international Sukuk."

The UAE's Aldar Properties is another serial Sukuk issuer and is said to be looking at its second issue, this time for AED3.5bn ($952m).

Bringing it all up to date there is also a Saudi International Petrochemical Company Sukuk on the horizon which is said will be for SR1.5bn ($400m) and will be a floating rate note issue with a 5-year tenor. Both Deutsche Bank and Riyad Capital have been mandated on the issue.

Perhaps the most salient part of almost all of these issues is that they are denominated in local currencies which would suggest that the issuers were all eyeing their home markets rather than the world at large.

With the ratings agencies having a field day downgrading Middle Eastern sovereigns throughout the region, the price issuers will have to pay to raise money from international investors has increased as they have raised their risk perspective of the region. But as Dey said: "Sovereign risk is irrelevant in these issues as almost all the buyers are local, in Al Jazira 's case they were Saudis. With other domains, like the UAE, where a lot of the issues have a transnational flavour, sovereign risk becomes more important," so the GCC banks may prefer to play at home.

The true test will be the first GCC issue - ideally a GCC Sovereign issue - that comes to market with a truly international roadshow with an issue that is for a longish tenor and is priced in dollars. Dubai would be the obvious candidate, with the debt rescheduling that it needs to undertake this year and next. But Dubai is not likely to want to pay any sort of premium over the cost of a conventional bond and this might prove to be the stumbling block.

© The Islamic Globe 2011