By Davide Barbuscia
DUBAI, March 29 (Reuters
) - Saudi Arabia is considering whether to change the structure of its planned U.S. dollar sukuk issue, which would be the kingdom's first international issue of Islamic bonds, banking sources told Reuters
Riyadh is expected to sell up to $10 billion of sukuk with an issue that could take place in the next few weeks, bankers say. It has been planning a hybrid structure for the sukuk.
The structure would comprise a mudaraba agreement, a form of Islamic investment management partnership, plus a murabaha facility that would trade commodities with a special purpose vehicle.
But potential changes to that structure are now under discussion to make the instrument more easily tradable and less complex to understand for international investors, the sources said. A spokesman for the Saudi finance ministry declined to comment.
Some bankers who are not involved in the deal said they believed the debate over the sukuk structure might be the reason that Saudi Arabia had not already launched the issue, given the current favourable market conditions with low credit spreads in the region.
A hybrid mudaraba-murabaha structure is being used in a private placement of riyal-denominated sukuk now being conducted by Saudi Aramco, the national oil company.
But this structure may be too complex for some international investors, possibly to the point of testing their appetite for the issue, said one banker familiar with the debate, declining to be named because the matter is private.
While Gulf investors and a sub-set of Western institutions would probably be comfortable with a hybrid sukuk structure, Riyadh might need to attract a wider investor base for an issue approaching $10 billion, which would be the world's largest dollar Islamic bond sale.
So the structure may be changed to an ijara format, a lease-financing structure which is common among sovereign sukuk issuance around the world and is better known internationally, some bankers said.
An ijara sukuk, however, might require the transfer of some assets pledged for the sukuk into a special purpose vehicle. Shifting sovereign assets into an SPV could lead to legal and regulatory hurdles, the bankers said.
The complexity of sukuk and investors' lack of familiarity with them has long been recognised as barrier to growth of the market. For that reason, two top standard-setting bodies in Islamic finance have in the last few months proposed new guidelines for sukuk, aiming to make them more transparent and standardised.
The new issue would be Saudi Arabia's second international bond sale after a $17.5 billion debut conventional bond issue last October. That was the largest-ever emerging market debt sale.
The kingdom started tapping international debt markets to diversify its sources of finance and plug a huge budget deficit caused by low oil prices.
Citi, HSBC and JP Morgan are global coordinators on the planned issue. BNP Paribas and Deutsche Bank are also involved with lead roles, and other banks might join the group of lead managers, banking sources have said.
(Editing by Andrew Torchia/Jeremy Gaunt) ((Davide.Barbuscia@thomsonreuters.com;))