The pattern is almost predictable. Sovereign and quasi-sovereign Sukuk issuances that have come on the market in the last few months have attracted so much investor attention that the size of the offerings has had to be increased. This, despite the tightening of the pricing compared with conventional bonds by the same sovereign issuer and the recovery of yields and spreads.
It happened with the recent domestic issuances in Malaysia and Indonesia and it happened only a few days ago with the issuance of the latest (the third) sovereign Sukuk Al-Ijara by the Central Bank of Bahrain (CBB) on behalf of the government of Bahrain. In an official statement, the CBB confirmed that the initial size of the Sukuk offering was $500 million but the issue was oversubscribed by almost 8 times. As a result, the value of the Sukuk was raised to $750 million.
Under Article 4 of the Central Bank of Bahrain and Financial Institutions Law 2006, the CBB is empowered to issue debt securities on behalf of the government of Bahrain. “One of the major reasons behind this issue was to establish a yield curve benchmark for longer-term Islamic securities,” said Sheikh Salman bin Isa Al-Khalifa, executive director, banking operations, CBB.
This staggeringly heavy demand suggests that the GCC (Gulf Cooperation Council) and global Sukuk market are coming back with a vengeance, at least as far as sovereign benchmark issuances are concerned. Bankers stress that with the number of issuances in southeast Asia, the recent DAAR issuance in Saudi Arabia and now the Bahrain sovereign Sukuk, augurs well for the GCC Sukuk market which, according to a recent report by Trowers & Hamlins, the London-based international law firm, is on the way to recovery.
Bankers in Bahrain explained that the oversubscription was remarkable especially in the current challenging market environment, and that it reflected the high level of international confidence in sovereign Bahrain. In addition, the geographic distribution of the Sukuk certificate subscribers includes investors from Asia, the Middle East and Europe.
According to Trowers & Hamlins, the average price of GCC corporate Islamic bonds has jumped by a dramatic 29 percent since the market reached its trough in February 2009. This said the law firm is a reflection that confidence in the Gulf is recovering fast. In comparison, the average price of US corporate bonds remained virtually unchanged (falling 2 percent) over the same period.
“Since the market’s darkest day on Feb. 11 the average yield on corporate GCC Sukuk has fallen from 17.2 percent to 10.1 percent and the average credit spread over LIBOR has narrowed from 1,414 to 763 basis points, based on the HSBC/ DIFX GCC Corporate US Dollar Sukuk Index,” said the report.
Indeed, the Bahrain benchmark US dollar five-year Sukuk, which is jointly lead managed by Calyon, Deutsche Bank and HSBC Bank, has a spread of 340 basis points over 5 year US Treasuries and was marketed successfully in Asia, the Middle East and Europe and priced well below Bahrain’s CDS (Credit Default Swaps) levels. “This issue reaffirmed the market’s appetite to invest in Bahrain’s debt securities and was well received internationally, with a major portion of subscriptions coming from outside the GCC,” emphasized Sheikh Salman of the CBB.
Standard & Poor’s (S&P) and Fitch, the international credit rating agencies, both have assigned an ‘A’ rating to the $750 million Bahrain sovereign Sukuk Al-Ijara issuance, which is similar to sovereign Bahrain’s A/Stable rating.
The Sukuk was issued by CBB International Sukuk Company (No. 2), a special purpose vehicle, on behalf of the government of Bahrain. The rating, stressed S&P, is “based on our view that Bahrain will treat equally its obligations under the transaction and the performance of the Sukuk as for the servicing of its conventional debt.”
S&P further stated that under the Sukuk certificate purchase agreement, Bahrain “contractually qualifies all of its payment obligations under the transaction documents as direct, unconditional, unsubordinated, unsecured, and general obligations of the government backed by the full faith and credit of the Kingdom.”
Abdul Rahman Al-Baker, executive director of financial institutions supervision, CBB, recently confirmed that the CBB’s third international Sukuk will be listed on the London Stock Exchange.
“The CBB, “he added, “having pioneered the development of Sukuk, remains active in the sovereign Sukuk market, with a total of $1.69 billion medium to long-term Sukuk issued to date, complemented by a regular program of short term issuance. It is the CBB’s hope that such initiatives will go a long way in harmonizing market practices and creating a deep and vibrant Islamic capital market.”