For perhaps the first time in the modern history of
Islamic finance, some debt issuers are finding it cheaper to raise money
through sukuk than through conventional bonds.
That is because of strong demand for sukuk from Islamic
investors, as a lack of supply so far this year means many portfolio managers
and Islamic banks in the Gulf and elsewhere have liquidity to deploy. Their
demand has helped to make the secondary market in sukuk more stable than
conventional bonds during the global financial turmoil of the last few
months.
"The reason the sukuk market performed as well as it
did in the past, and why sukuk held up in the secondary markets, is because
there was an imbalance on the supply and demand side," said Usman Ahmed,
senior portfolio manager at Emirates NBD Asset Management.
Now, that imbalance looks likely to partially correct
itself with a spate of sukuk issues from Abu Dhabi and elsewhere in the region,
potentially eliminating any pricing advantage of Islamic bonds for
issuers.
"With the new burst of issuance, you'll see that
imbalance even out a little. We expect the existing sukuk to sell off slightly —
it's already happening — in anticipation of the new issues, which are offering
investors more concession," Ahmed said.
BAHRAIN
Two Gulf issuers may tap Islamic debt markets with a
sukuk issue on Wednesday. One is Bahrain, hit by political unrest earlier this
year, which completed roadshows earlier this week for an eventual bond.
Guidance for Bahrain's seven-year benchmark-sized sukuk was set at 450 basis
points over midswaps on Wednesday.
Meanwhile, Abu Dhabi Commercial Bank is eyeing at least
$500 million from its debut dollar sukuk; on Wednesday it set price guidance in
a range of 275-287.5 bps over five-year midswaps. The last sukuk from an Abu
Dhabi financial institution was issued in late July, just before the euro zone
sovereign debt crisis rattled global markets and dampened issuance of many
kinds of debt.
"The reality is that Islamic banks still have a lot
of money to put to work and some, anecdotally, have significant liquidity.
There is still unutilized demand out there, and so pricing on a sukuk will be
tighter than a conventional deal — maybe by 10-20 bps," said one regional
banker, declining to be identified.
"Before, it was all about the big-name London
investors but now, the power has been transferred to Middle Eastern investors
and much depends on their appetite."
First Gulf Bank priced a $650 million five-year sukuk at
200 bps over midswaps in July, offering a coupon of 3.797 percent. The bond is
currently bid at around 103.00, yielding 3.1 percent; it has narrowed over 40
bps since the end of September.
Similarly, Abu Dhabi Islamic Bank's outstanding $750
million five-year sukuk maturing 2015 was trading at 102.1 on Wednesday,
according to Thomson Reuters data; the yield is about 70 bps lower than levels
a year ago.
By contrast, Abu Dhabi's Union National Bank tested
appetite for a conventional issue earlier this month, raising $400 million in
five-year debt. The bond was issued at 287 bps over midswaps, and fell short of
raising the intended $500 million minimum due to weak investor response.
ADCB
If ADCB can price its sukuk at the tighter end of
guidance, it will suggest new sukuk issuers are still avoiding paying any
premium to conventional bonds -- a sign that heavy underlying demand for sukuk
persists.
"There might be the need to be a bit more generous
to get the wheels in motion, but the money is there to be put to work,"
said a London-based banker.
However, new sukuk issuance is starting to prompt sales
of existing sukuk -- a sign that the supply-demand gap in the market is
beginning to close, and that future issuers may not be able to impose terms
that are quite as cheap. The bid on FGB's sukuk temporarily came off to 101.25
on Wednesday morning, after ADCB's price guidance was issued.
Another indicator is Indonesia's new sukuk, issued this
week. The $1 billion, seven-year issue drew massive demand of some $6 billion
and was priced at 4 percent, 25 bps tighter than guidance and offering no sukuk
premium; its new-issue premium was only 20 bps over the country's conventional
sovereign bonds. But the sukuk is now trading lower in the secondary
market.
"What you'll see is coming sukuk will pay better
now, because that's the tone that has been set," said a regional fixed
income trader. "No one is bidding the old sukuk now."
Later issuers in the pipeline may now face significantly
higher costs than earlier issuers. Among possible future issuers, ADIB will
kick off investor meetings on Nov. 17 for a potential dollar sukuk, while Abu Dhabi's
Al-Hilal Bank has signaled it could print an Islamic deal in the first quarter
of 2012. "This is like a runway. You can't land all the planes at
once," said an Asia-based banker.
