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USD20bn sukuk in January, restructuring debt driver in 2012

By Abir Atamech, Sukuk Analyst, Zawya
01 February 2012
GLOBAL SUKUK REVIEW: January 2012 January was a remarkable month for the global sukuk industry and marked a very promising start for the year. USD 20 billion sukuk were issued in the month according to Zawya Sukuk Monitor, making January 2012 by far the best month on record in terms of issuance since 1996. Issuance was inflated by two exceptional sukuk in terms of size - Saudi's General Authority for Civil Aviation (GACA) USD 4 billion sukuk and Malaysia's PLUS USD 10 billion sukuk.



Three banks from the UAE managed to sell USD 1.3 billion sukuk in January. The three sukuk were sold in the international market, and were met by oversubscription, partly reflecting international investors' confidence in the financial strength of these banks on one hand, a thirst for Islamic bonds, and a shift away from the deteriorating credit rating of Europe based issuers.

Abu Dhabi's First Gulf Bank (FGB) issued a USD 500 million sukuk tranche under the USD 3.5 billion program set up in July 2011 which was oversubscribed 2.8 times. Emirates Islamic Bank (EIB) successfully closed a USD 500 million sukuk on January 18, 2012, oversubscribed three times. Tamweel sold a USD 300 million Irish Stock Exchange-listed sukuk guaranteed by its major shareholder Dubai Islamic Bank. All three issues were of five-year tenor and paid 4.046%, 4.718% and 5.154%, respectively.

UAE's Al Hilal Bank could be the next UAE lender to join the club of sukuk issuers after it confirmed it has hired National Bank of Abu Dhabi, HSBC and Standard Chartered Bank to manage its USD 500 million Islamic bond issue.

Saudi Arabia's Debut Sukuk

Saudi Arabia's General Authority for Civil Aviation sold a 10-year SAR 15 billion sukuk fully guaranteed by the ministry of finance. This is the first sovereign sukuk out of the kingdom, as well as the first sovereign out of the GCC this year. "It is expected to set the benchmark for more sovereign and corporate sukuk out of the kingdom in 2012 and it would place Saudi Arabia on the sukuk map like it was never before," according to Adnan Halawi, Zawya's Fixed Income Analyst.

GACA's sukuk has a number of interesting characteristics. Besides being the first Saudi sovereign sukuk, it was sold in the domestic market, which made some critics say the kingdom should have opened subscription for international investors. For such an enormous issuance, being oversubscribed three times means Saudi investors are just around the corner to buy their safe country's debt.

The government will seriously now use the debt capital market to finance its construction and development projects and make use of the readily available excess liquidity. Indeed, the successful issuance was followed by a statement that GACA plans to sell the second tranche before the year ends.

Debt Refinancing

Replacing debt by debt seems to be a key driver for the sukuk markets this year. In Malaysia, January witnessed two initiatives in this direction. Projek Lebuhraya Utara-Selatan (PLUS) alone set up a MYR 30.6 billion (USD 10 billion) sukuk program comprising government guaranteed and non-government guaranteed issuances. PLUS used the proceeds of the mega sukuk to early-redeem all the outstanding amounts under its 2006 and 2007 sukuk facilities. Similarly, but at a smaller and corporate scale, Musteq Hydro issued a MYR 80 billion sukuk and followed that by redeeming all its outstanding earlier sukuk.

The GCC region has USD 10 billion Islamic papers maturing in 2012. Last year, real estate developer Nakheel repaid its sukuk by issuing another one to its creditors. At least USD 10 billion of GCC sukuk mature this year according to data compiled by Zawya Sukuk Monitor. The long list includes Dana Gas, JAFZA, DIFC, and Dar Al Arkan to name a few.

The list of sukuk maturing in 2012 is long given that 2007 was a record year for Gulf sukuk issuers and most of these sukuk had a tenor of five years. The list includes EIB which already issued a sukuk in January ahead of the maturity of its first tranche in May 2012.





Source: Zawya Sukuk Monitor

Dana Gas announced it has hired an international firm to advise on the best way to repay its USD 1 billion sukuk maturing in October 2012. The yield of Dana Gas Sukuk rose to an all-time high of around 50% according to Zawya Sukuk Monitor's secondary market prices, on rising concerns over the financial strength of the company.

Dana Gas' receivables from Egypt, where the company produces the bulk of its oil and gas output, are jeopardized.

Dana Gas Sukuk Average Price/Yield





Source: Zawya Sukuk Monitor Secondary Market Prices

Conventional Borrowers

More conventional borrowers are expected to hit the market soon. While US-based Goldman Sachs's sukuk might not see the light anytime soon due to the controversy over it Shariah compliance, UAE-based Majid Al Futtaim initiated investor meetings on January 29 for its recently set up USD 1 billion sukuk programme and managed to sell USD 400 million, the company's first bond ever - interestingly enough, a sukuk.

Corporate conventional borrowers are not the only ones opting for sukuk. On a sovereign level, the governments of South Africa and Ireland will tap the sukuk market for the first time in the coming months, according to media reports.

Banks which will not sell sukuk themselves are looking for opportunities to manage and sell sukuk on behalf of other issuers, in an effort to grab a share of the booming Islamic finance industry. France-based bank Credit Agricole announced it was hired to manage two sukuk issuances in Saudi Arabia. Citigroup said it is looking to enter Turkey's sukuk market. Al Baraka Turkish Bank renewed plans to issue USD 200 million sukuk in the first quarter of 2012.

Indonesia - the world's most populated Muslim country, which was almost absent from the sukuk landscape in January - is keen on grabbing a bigger share. Besides its fourth issuance of retail sukuk - expected in March 2012, the Indonesian government made its second attempt to sell project-based sukuk (PBS) in its domestic market on January 31. The attempt turned out successful and fruitful this time. Indonesia's bouquet of sukuk offerings is richer than ever with short-term Islamic treasury bills, Haj, retail, PBS and global sukuk.

January's record issuance does not necessarily mean that we will see a similar value of sukuk issued every month, but certainly that we are heading toward another record year. Should we examine closely the nature of these sukuk, and the other developments and announcements that took place in January, the market could witness an eruption of long-awaited issues and a number of unexpected surprises in 2012.



Abir Atamech
Sukuk Analyst - Zawya
abir.atamech@zawya.com

© Zawya 2012