|05 November, 2019

GCC deal pricing bode well for Sukuk issuers

Sukuk from the region have tended to outperform their conventional peers

Saudi issues $7.5 billion in international bonds in January 2019. Image used for illustrative purpose.

Saudi issues $7.5 billion in international bonds in January 2019. Image used for illustrative purpose.

Getty Images/ Mohd Kafii Isa / EyeEm

The significant move lower in global rates and the attractive pricing of recent GCC Sukuk deals in the Arabian Gulf would encourage issuers to come to the market in the coming months to take advantage of the outstanding international demand for paper from the region.

Abu Dhabi’s Aldar Investments, the asset management unit of Aldar Properties, successfully placed a 10-year, $500 million Sukuk in mid-October, achieving a coupon of 3.875 per cent—the lowest rate ever achieved by Aldar. The deal, which was the first ever 10-year Sukuk by an Abu Dhabi issuer, was 6.4 times oversubscribed, accumulating more than $3 billion in orders from over 190 global and regional investors. It had unprecedented international demand resulting in 71 per cent of the total transaction being allocated to foreign investors.

With trillions worth of global debt currently trading at negative yields, it is not hard to see why investors are looking to the region for yield, with many issuers closely linked with highly rated sovereigns. Other issuers this year include ports operator DP World, the Governments of Sharjah and Oman, and a jumbo $12 billion by Saudi Aramco, which has been looking to foster relationships with international investors ahead of its planned IPO.

Sukuk from the region have tended to outperform their conventional peers and to achieve tighter spreads with difference usually ranging from 5 to 10 basis points depending also on market conditions.

This is driven by a combination of factors, including the relative scarcity of Sukuk issuance in general and the fact that the pool of Islamic investors that are keen to partake in Shari’ah’a- compliant instruments only, can lift demand for Sukuk by as much as 30 per cent to 40 per cent versus comparable conventional bonds from the region. This investor demand also leads to a trend of outperformance on secondary markets, which in turn contributes to strong demand for new issuance.

After a spate of issuance, the fourth quarter of this year is likely to be more subdued, as liquidity is starting to dry up as investors have largely fulfilled their commitments for the year. Deals coming to the market now will need to offer a small premium of 10 to 15 basis points to attract significant interest.

However, the ingredients are all there for a surge of issuance in early 2020. Benchmark rates are likely to remain low, and Sukuk premium is likely to hold strong. This is an opportunity for issuers from the region to lock in low cost of capital and extend the overall duration of their liabilities.

— Amir Riad

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