In the last three months, the sukuk market in the Gulf Cooperation Council (GCC) countries has shown a remarkable turnaround from the difficult days of early 2009. The GCC market has effectively been playing catch up to developments in the sukuk market in Asia during 2009, where Singapore, Indonesia, Malaysia and Pakistan have led the sector into recovery with a string of issuances starting in February 2009, largely government local currency sukuk and a number of sovereign international sukuk.
In the GCC at the time, only sovereign Bahrain and the quasi-sovereign Jeddah-based Islamic Development Bank (IDB) went to the financial market with global sukuk issuances to raise funds.
Two revealing indications that times are changing for the better is the repayment in full in November 2009 by the government of Dubai, acting through the Department of Finance, of the $1 billion Dubai Civil Aviation Authority sukuk, which matured on Nov. 4, 2009. In October, the Dubai government clarified its direct sovereign obligations totaling $20.3 billion equivalent, which were largely due in 2011.
To what extent the bailout of Dubai by neighboring Abu Dhabi has contributed to the return of cautious optimism in the hitherto profligate emirate is not clear. Last October, the Dubai government clarified its direct sovereign obligations totaling $20.3 billion equivalent, which fall largely due in 2011, thus giving the House of Maktoum some breathing space to get its finances in order and on track again.
Investment bank, Calyon estimates Dubai’s total debt at $80 billion, of which $50 billion is held by the government entity DP World, which in November asked creditor banks for a “standstill” agreement to give it some breathing space so that it can negotiate an extension to its debt maturities. One payment that fell due in December was the periodic payments on the $3.52 billion sukuk of Nakheel, a subsidiary of DP World, the developer of the now notorious and profligate palm tree island project. The Abu Dhabi largesse saved the day for Nakheel and its immediate reputation.
Dubai successfully issued a two-tranche, $1.93 billion sukuk at end October 2009, which bankers stress was well over-subscribed and which generated an order book with over 300 investors placing orders in excess of $6.3 billion. While Dubai government officials such as Abdulrahman Al-Saleh, director general of the Department of Finance, inevitably see this as recognition “of the achievements and bright prospects of Dubai by the global investment community and high levels of confidence in the emirate,” bankers stress that it has more to do with the international, regional and local financial communities’ belief that Abu Dhabi will stand by Dubai and effectively be its lender of last resort.
The government of Dubai, acting through the Department of Finance, has announced that it has raised a further $5 billion as part of its $20 billion long-term bond program launched at the beginning of 2009.
In November, Dubai raised a further $5 billion as part of its $20 billion long-term bond program launched at the beginning of 2009 which is managed by the Dubai Financial Support Fund (DFSF), which was established with the specific purpose of providing liquidity to government and Government-related entities undertaking projects deemed to be of strategic importance to Dubai.
The $5 billion tranche comprises two issuances — a $2.5 billion conventional bond fully subscribed by National Bank of Abu Dhabi and a $2.5 billion sukuk fully subscribed by Al-Hilal Bank.
In Kuwait in December The Investment Dar Co. (TID) finally presented its debt restructuring plan to its wider bank and investor group in the GCC. Adnan Al-Musallam, chairman and chief operating officer in a statement stressed that, “the impact of the global financial crisis is still being felt across the region and it is important that TID and its banks and investors work together to conclude the proposed restructuring as quickly as possible. TID is firmly committed to the process.”
In a recent special report, titled “Global Sukuk Issuance Surges as Effects of Credit Crisis Recede: Overview and Trend Analysis”, Moody’s, the international credit rating agency, concluded that global issuance of sukuk has surged in recent months in a marked turnaround from earlier in the global credit crisis, although issuances are dominated by sovereigns and government-related entities. Sovereign issuances, according to the report should lead to a more efficient and sound market, and also to the development of a more detailed yield curve, and hence a risk benchmark across several tenors and credit profiles.
“Global sukuk issuance rose over 40 percent in the first ten months of 2009 compared to the same period last year. This marks a clear turnaround compared to the declining trend witnessed in the second half of 2008, when the impact of the global credit crisis started to be felt in many regions, including the GCC and Asia Pacific. Moody’s anticipates that full-year growth in global sukuk issuance will reach around 50 per cent this year, offsetting the 55 percent decline seen in 2008,” concluded the Report.
In the GCC countries, a motley of institutions have issued sukuk or considering going to the market in due course.
In Saudi Arabia, Saudi Hollandi Bank successfully closed its second sukuk last week following on from its debut $150 million issue in 2008 — a privately placed sukuk to raise Tier-II capital for the bank. The latest SR725 million issuance is the bank’s first publicly-listed sukuk, which were jointly lead managed by Riyad Capital and Saudi Hollandi Capital, who also acted as bookrunners for the transaction.
The Mudaraba sukuk is essentially a 10-year floating rate note (FRN), with an option to call the issue after five years. The sukuk is priced at SIBOR plus 1.90 percent per annum to be distributed bi-annually which is considered tight. Once again, the sukuk was oversubscribed four times indicating strong appetite for such papers from Saudi investors. However, the Saudi economy has been much less affected by the credit crunch and the financial crisis, and as such it would indeed have been a blow to the sukuk market recovery had the above sukuk fail to attract the demand it did or was forced to delay its launch.
Perhaps more importantly, Bernd van Linder, managing director of SHB, is confident that the Saudi Hollandi’s issuances would support the further development of the Saudi riyal debt capital market, especially the sukuk market.
Two other issues that have caught the eye and have been well received and subscribed by inter alia GCC institutions is the $100m sukuk issue in October 2009 of the International Finance Corporation (IFC), the private sector funding arm of the World Bank Group.
The 5-year Aaa-rated sukuk, jointly lead arranged by HSBC, Dubai Islamic Bank and KFH-Bahrain was well oversubscribed and the proceeds will be used to support IFC’s plans to increase funding for development activities in emerging markets, including the MENA region.
The IFC believes that potentially Islamic finance and especially the capital markets may have a bigger role to play in economic development in the MENA region. Not surprisingly, the IFC has participated in several Islamic financing facilities including an equity stake in a joint venture Islamic mortgage company in Saudi Arabia, the Saudi Home Loans Company.
In a market, first, GE Capital, the finance arm of General Electric of the US, a few weeks ago also closed its debut sukuk — a 5-Year $500 million issuance whose proceeds will be used for general corporate and balance sheet purposes.
According to Kathy Cassidy, GE’s senior vice president and treasurer, “This transaction is strategically important for GE as it establishes yet another way of raising funds from an important investor base. We have been focused on diversifying our alternative funding sources to include global deposits and covered bonds, and transactions such as the sukuk allow us to make progress in meeting our objectives. We intend to be regular issuers in the sukuk market and are heartened by the support we have seen in this first transaction.” As such, issuances by major international corporates could do more for the recovery of the global sukuk market than any bail out by a GCC emirate.
