RIYADH, 19 July 2006 — Saudi Arabia’s first Islamic bond, a 20-year corporate issue of up to $800 million, has been oversubscribed and will price at 40 basis points above the Saudi interbank offer rate, lead managers said on Monday.
Saudi Arabian Basic Industries Corp.’s (SABIC’s) bond was open only to institutional investors in Saudi Arabia.
Analysts see the development of an Islamic bond, or Sukuk, market in Saudi Arabia as a key to the expansion of Islamic finance.
Although the Sukuk expires in 2026, making it the longest dated Islamic bond in history, investors can redeem the bond at face value from SABIC in five years. The lead managers said they expected few investors to hold the bond beyond that date.
SABIC, a petrochemical group and the largest listed company in the Arab world, secured regulatory approval to raise up to SR3 billion ($800 million) but officials at lead managers HSBC said demand had far exceeded that figure even before books closed yesterday.
“There is substantial investor interest which was also expected... this being the first Sukuk in this market...” said Rajiv Shukla, HSBC’s director of investment banking.
“The order book is still climbing beyond the size that is needed ... It is already oversubscribed.” The Sukuk is structured to resemble a floating rate note.
Investors can hold the Sukuk until 2026, but will be entitled to sell the bond to SABIC in July of every fifth year.
The amount SABIC pays back will diminish from 100 percent of face value in 2011 to 40 percent in 2026, according to the offer documents from HSBC. Returns will be paid quarterly from Oct. 15 this year.
SABIC, 70 percent owned by the Saudi government, has announced plans for SR100 billion in capital expenditure in the three years to Dec 2009. SABIC is investing heavily in its Saudi operations and is in talks on expansion into China. The Sukuk, first announced by SABIC in March, is seen as a key step in developing Saudi Arabia’s largely equities-based financial markets. The bond will be listed on the Saudi bourse.
Islamic finance, built around the concept of profit-sharing rather than interest, is one of the world’s fastest growing niche financial markets, driven in part by the recycling surplus dollars from the Gulf Arab region.
Assets of Islamic banks are believed to range between $200 billion and $400 billion globally but they have relatively few avenues in which to invest that money.
The total value of outstanding Sukuk issues is around $18 billion so major Sukuk issues often attract strong demand.
Last year Dubai’s Ports, Customs and Free Zone Corporation offered a $2.8 billion Sukuk - the first ever convertible Islamic bond. Demand was so strong that amount was raised to $3.5 billion making it the largest Sukuk in history.