Satorp Paves Way For Saudi Project Sukuk Issuers With $1Bn Offering

Satorp Paves Way For Saudi Project Sukuk Issuers With $1Bn Offering

With its successful launch of SR3.749bn ($1bn) of sukuk, Saudi Aramco Total Refining and Petrochemical Company (Satorp) has prepared the ground for other projects in the kingdom seeking to issue Shari'a compliant paper. The 400,000 b/d Satorp export refinery project in Jubail, costing $12.5bn and sponsored by state oil giant Saudi Aramco and French oil major Total, issued the debut sukuk on 9 October. They form part of a multi-component project financing for Satorp and will be used to scale back bank commitments. Commercial and Islamic banks agreed to participate last year along with export credit agencies (ECAs) and Saudi institutional investors, with some financing also being supplied via sponsor loans (MEES, 5 July 2010).

The Satorp Sukuk was 3.5 times oversubscribed at lean pricing of only 95 basis points (bps) over the Saudi interbank offered rate (Saibor) coming in at the low end of 95-105 bps guidance. The issue was limited to Saudi nationals and investors were primarily government funds and banks. The issue’s success is encouraging for Saudi Aramco and the US’s Dow Chemical, which are sponsoring the $20bn Sadara petrochemical project. Sadara’s project financing is in the early stages, with ECAs only recently approached (MEES, 8 August), and down the line the sponsors are considering issuing sukuk and bonds as part of the financing plan, MEESunderstands.

While the Satorp project is notable for issuing Saudi Arabia’s first project sukuk, finance experts in the kingdom warned against drawing conclusions about the market from the result, with one noting that “oversubscription and pricing are very much issuer and relationship driven.” This was also the case on the project financing, with banks signing up to the deal last year providing funds at all-in pricing (including margins and fees) of 185 bps, which was a record low for the Gulf since the credit crunch (MEES, 28 June 2010).

Investors do not generally want to hold long dated limited recourse instruments with call options that ultimately change the tenor, said one bank expert, noting that that the Satorp Mudaraba sukuk carries a 14-year tenor and an embedded call option (so it matures in 2014). Even in mature markets like the US the project bond market tends to be confined to a very specialized group of investors, let alone in Saudi which is in the early stages of development, he stressed.

While the Satorp sukuk results are largely a function of the sponsors’ financial clout, the Saudi markets nevertheless remain liquid and those with more routine types of issue have not surprisingly seen considerable investor appetite. The three times oversubscribed SR1.8bn ($480mn) Sipchem sukuk issued in June this year, priced at 175 bps over Saibor, was market driven, reflecting liquidity and lack of assets in the market. This also applies to the 364-day SR1bn ($267mn) sukuk issued by the Saudi Binladin group, which was also three times oversubscribed. “The market gobbled up the Binladin issue because interest rates are low and people are looking for investment opportunities. A one-year tenor is perfect because you can get a return but you don’t get caught out when interest rates start moving up again,” commented a bond expert.

The strong demand from investors is likely to encourage further sukuk issues, and it is possible some may come to market in the kingdom before the year’s end. “We find government institutions and banks are liquid and have relatively few avenues to invest,” he said. “Thus far this year there has not been much paper hitting the market, so investors are very hungry,” he adds. In addition to the aforementioned market participants, other Saudi sukuk issuers who have tapped the market in the past include SABIC, Saudi Electricity Company, Saudi Hollandi, and Dar al-Arkan.

In the kingdom, potential issuers can take two routes – either private placement or public offer. Private placement regulations, said bankers, are relatively lenient, and contrast with public offer issuances which are much more stringent. In fact one banker described the public issues as “extremely painful.” He said that it took one issuer over a year of expense and hardship to tread the public route, when it could have probably got the same results in a month and a half via private placement.

“If going through a public offer gave an issuer a much bigger investor base, it would be worth it, but the reality is that it pretty much gives you the same,” said the banker. The main difference is that mutual funds cannot participate in private placement without the regulator’s permission. However, some were attracted by the Saudi Binladin offer, so they went ahead and got the green light from the Capital Markets Authority, he recalled.

“The rationale for trying to keep it public is to expand the market for retail investors, but that market is not there, and will take years to develop,” he said. He also suggests that some bond issues and IPOs are going ahead for greenfield projects or newly licensed operations too early, before a given company has a track record. While in Saudi Aramco’s case this is a moot point, given its strength, on some issues investors have been burned, noted the expert.

Gulf Issuers Mull Bond Issuance As Market Stays Choppy

In the wider Gulf a number of bond or sukuk issuers are considering an approach to market, although conditions are unpredictable and choppy, given the ongoing European debt crisis, and continued concern about US economic growth. Issuance has been down on last year’s levels, largely as a result of the global market problems, but earlier this year also due in part to regional concerns relating to the Arab Spring. In 2010 the MENA region and particularly the Gulf saw robust debt market activity, with new bond issues nearing the highs seen in 2009. There were expectations that 2011 would be even better, but unless there is a sudden change and a flurry of paper comes to market in the remaining few months, this year is going to see a marked fall from 2010. Last year the issuance of notes and sukuk was up on 2009’s levels to about $32-34bn (MEES, 6 December 2010). Bond experts said that this year would show a steep decline.

Sponsors of the 1.4bn cfd Qatar Barzan gas project are hoping to issue a conventional bond. RasGas is implementing the project, and already has a good base of bond investors with the last RasGas bond, for the RasGas 2/3 LNG project, coming in heavily oversubscribed and attracting record high orders for the region of $18bn (MEES, 27 July 2009). Barzan has attracted 30 banks to its project financing (MEES, 10 October) and joint lead managers for the bond issue (144a to comply with US investment law) will be chosen from their ranks. The ratings process for the bond has been undertaken and the offering circular has been drafted, MEESunderstands. However, some market observers suggest that the sponsors may wait for a ‘window’ early next year for their market approach.

Bahrain is hoping to issue a $1bn sukuk in order to help bridge its budget deficit and has hired bookrunners for the bond, after delaying its approach to market as political unrest escalated earlier in the year. The situation has stabilized, even though tensions remain, and the authorities are pressing ahead via the sukuk route (MEES, 3 October). “There are pros and cons to sukuk but so far this year there has been a strong underlying bid for this type of paper. Sukuk issuers have found a pricing advantage because Islamic investors have hunger for sukuk assets, but there is also strong bid from conventional banks who are building out dedicated sukuk portfolios,” said one UAE-based bond specialist.

However, he remains pragmatic. “We’re all very watchful of the markets. We’re not going to get the same kind of pipeline that we had last year – three to four deals from the region per week. It was a very strong market. Things change and it’s now a very volatile and nervous market. When the windows open there’s a lot of desire from investors to get deals done, so anyone who is ready can take advantage. But I think for the rest of the year it’s going to be very stop-start,” he said. What is encouraging for the region is that it, along with other emerging markets, is seeing better growth than more developed regions. “The oil story does play. A lot of the growth markets are commodity driven. A lot of investors like commodities while there is uncertainty about stocks. Clearly the countries that ride the commodity wave are going to benefit,” he adds.

Copyright MEES 2011.