Wednesday, Feb 22, 2012

(This story was originally published Tuesday.)

--Sukuk worth billions of Saudi riyal in pipeline, says HSBC

--Govt-backed sukuk helps set yield curve, say analysts

--Sukuk issues deepen Saudi capital markets too

By Ellen Knickmeyer

Of ZAWYA DOW JONES

RIYADH (Zawya Dow Jones)--The success of Saudi Arabia's first government-backed Islamic bond issue, and the dairy company Almarai's planned sukuk, will set the stage for what is likely to be one of the kingdom's strongest years for Islamic bonds, bankers and analysts say, with HSBC alone saying it is working on five corporate issuances.

The Almarai bond, for which a roadshow is planned later this week, plus the four as-yet-unannounced sukuk issues that HSBC is also preparing, would total "multiple billions" of Saudi riyals, Fahad al-Saif, the head of HSBC's debt-capital market division in Saudi Arabia, said in a recent interview.

General Authority of Civil Aviation's government-guaranteed sukuk last month--a 15 billion Saudi riyal ($4 billion), 10-year, zero-risk issue at a 2.5% profit rate--was oversubscribed 3.5 times, according to HSBC, which led the issuance.

The success of that sukuk demonstrated "there is enough liquidity and enough confidence" to support government-backed Islamic bonds in the kingdom, al-Saif said.

Saudi Arabia's government which is taking steps, albeit limited, toward opening the country's stock market to outside investors, is also encouraging the current expansion of the sukuk market, analysts say.

In the past, analysts have faulted what they said was inadequate government promotion of Saudi's sukuk market, saying the lack of encouragement contributed to the kingdom being bypassed by other world capitals as centers of Islamic finance, despite it being the Gulf's largest economy.

Critically for Saudi Arabia, the aviation authority's sukuk is also helping the market in setting a yield curve, al-Saif said. It answers the question "what is the risk-free rate of Saudi Arabia," he said, while pricing was "by complete trial and error" earlier.

A Moody's investor's note earlier this month also noted that the government-backed issue at a 2.5% yield has helped private sukuk issuers and lenders overall by providing a "much-needed benchmark with which to price long-tenor issuances in local currency."

By issuing government-backed sukuks, Saudi Arabia also is trying to expand the capacity of its capital markets, Khalid Howladar, an analyst with Moody's Investment in Dubai and al-Saif, the HSBC sukuk developer said.

For the kingdom's government, the main impetus for the move to government-backed sukuks "is likely to soak up some of the excess liquidity in the system," said Howladar.

"Saudi has been aggressively paying down its debt, so banks have been complaining for years about the lack of government bonds" as an investment option for Saudi institutions, Howladar said.

In launching government-backed sukuk here, "the most important aspect is to enhance money circulation within the financial system... compared to funds coming from the government directly," al-Saif added.

As Saudi Arabia's government has committed to $400 billion in infrastructure spending over five years, a better-developed capital market here would give Saudi lenders more options in funding those projects, analysts said.

In fact, after tasting success with its first issue, the aviation authority plans a second sukuk this year, also to help fund building the new international airport in the coastal city of Jeddah, Saudi Finance Minister Ibrahim al-Assaf told Zawya Dow Jones in January.

The total of other sukuks already launched or closed this year, including by the General Authority of Civil Aviation, National Commercial Bank, Islamic Development Bank and others, come to at least $2.15 billion, according to Zawya's Sukuk Monitor.

Saudi Arabia marked its peak year for sukuk in 2007, when $5.7 billion total in Islamic bond debt was issued, before the global downturn. Last year's tally of five still lagged well below that peak, at $2.76 billion.

-Ellen Knickmeyer, Dow Jones Newswires, +966 1 279 5252, ellen.knickmeyer@dowjones.com

Copyright (c) 2012 Dow Jones & Co.

(END) Dow Jones Newswires

22-02-12 0352GMT