Sukuk structuring experts such as Mohamad Safri Shahul Hamid, a senior executive of CIMB Islamic Bank, stress that the (Malaysian) ringgit sukuk market will continue to dominate with several mega issuances to fund infrastructure development activities and programs. Safri projects Malaysian Sukuk issuances to total up to RM60 billion in 2012 which would account for 70 percent of global Sukuk issuances for the year.
He is excited about potential new entrants coming to the market from the Asia Pacific region including South Korea, Hong Kong, Japan, and from other regions such as central Asia where sovereign Kazakshtan is keen to go to the market and some African countries such as Senegal and Nigeria are at least finalizing the regulatory and tax neutrality guidelines to facilitate Sukuk origination which would allow the respective governments to make an informed decision whether to raise financing through a debut benchmark sovereign issuance.
However, the major difference between GCC/MENA offerings and their Malaysian counterparts in 20911 and going forward is that the profile of issuances from the latter is geared more toward real economy activities especially raising financing to fund infrastructure development in the transport, agriculture and housing sectors by quasi-sovereigns such as Khazanah Nasional Berhad (the Malaysian sovereign wealth fund), the PLUS Group (the national road services entity) and Cagamas Berhad, the National Mortgage Corporation of Malaysia.
In contrast issuances in the GCC/MENA region are largely by financial institutions to finance balance sheet activities and to refinance existing debt, save those in Saudi Arabia where a number of the issuances have been to finance industrial expansion by utilities in the oil, gas, petrochemicals and electricity sectors such as Saudi Basic Industries Corporation (SABIC), Saudi Aramco's joint venture with Total SA of France, SATORP, and Saudi Electricity Company (SEC). The other real economy sukuk issuer of note is Daar Al-Arkan Real Estate Development Company (DAAR), which is one of the leading developers of housing in the Kingdom.
Some bankers in the MENA stress that the attraction of sukuk currently in a difficult global economic and financial climate is due to lower yields as compared with those for conventional bonds and the growing appetite by an evolving new breed of Middle East investors who are discerning and who wish to strike a balance between ethics and returns, and who are seemingly willing to forgo the odd basis points to achieve a more ethically-informed investment objective.
Others are less distinguishing stressing that execution, timing and pricing are the major considerations of investors in sukuk in the GCC region. The fact that GCC sukuk are trading at an average yield of about 4.5 percent, 50 basis points less than equivalent conventional bonds according to HSBC/Nasdaq Dubai indices, and because of the lack of depth to the sukuk market in the region with much fewer issuances and secondary market trading are both pull and push factors. Yields in the MENA region, currently of course are also dictated by other factors including political developments, economic stability and reforms, oil price dynamics, inward foreign direct investment and employment generation.
This is manifested in markets regarded as 'safe' and highly liquid. The 5-year $500 million regulated sukuk offering by Abu Dhabi-based First Gulf Bank (FGB) which closed last week, for instance, was oversubscribed by 2.8 times with the order book showing orders of $1.4 billion, and priced at MS (mid swaps) plus 287.5 basis points and giving a fixed profit rate of 4.046 percent per annum.
The sukuk was issued through a special purpose vehicle, FGB Sukuk Company Limited, and is the latest tranche under FGB's $3.5 billion Trust Certificate Issuance Program. The issuance, lead managed by Citi, HSBC, National Bank of Abu Dhabi (NBAD) and Standard Chartered, was rated as A2 (Stable) by Moody's and A+ (Stable) by Fitch, and will be listed on the London Stock Exchange.
In a statement Andre Sayegh, CEO of First Gulf Bank (FGB) explained that this second FGB sukuk transaction also "witnessed overwhelming responses from investors in the Middle East, Europe and Asia. Our business strategy and global expansion activities have reaffirmed people's trust in our bank and global investors continue to endorse our offerings. The proceeds will be used for general corporate purposes and to enhance our services and continue to diversify our funding base and our offerings." Middle East investors subscribed to 69 percent of the allocation, while Asian investors accounted for 16 percent and European investors for 15 percent.
However, lest euphoria sets in, the sukuk market recovery still has some way to go to reach the positive pricing and yield dynamics of the pre-crisis 2007 levels. The debut FGB sukuk in 2007 for instance was oversubscribed six times with the YTM much tighter at MS plus 200 basis points giving a fixed profit rate of 3.797 percent per annum. The participation of European investors was much higher at 24 percent perhaps reflecting the fallout of the euro zone debt crisis.
Similarly, Emirates Islamic Bank (EIB) successfully closed its 5-year $500 million sukuk, the first issuance by the bank since the onset of the global financial crisis in 2007. The offering was three times oversubscribed with the order book totaling $1.5 billion in bids, and was priced at MS (mid swaps) plus 350 basis points, with a profit rate of 4.718 percent per annum. Once again Middle East investors accounted for 57 percent of the subscription followed by 29 percent by Asian investors and 14 percent by European investors.
An important sign of the recovering market especially in Dubai is the 5-year $300 million sukuk issuance by Tamweel, the Dubai-based Shariah-compliant mortgage provider which has been facing a difficult last four years due to the serious downturn in the local housing market and real estate market.
The sukuk, which is lead managed by Citi, Dubai Islamic Bank (DIB) and Standard Chartered Bank and issued under Tamweel's $1 billion sukuk program, is guaranteed by Tamweel's majority shareholder, DIB, which owns 57.33 percent of the company. The offering is priced at MS plus 400 basis points with a profit rate of 5.154 percent and is rated A by Fitch Ratings and Baa1 by Moody's Investors Service. Application to list the issuance on the Irish Stock Exchange has also been lodged.
Another significant sukuk issuance program being finalized is the $1 billion program to be issued by Majid Al-Futtaim Holding (MAF), the sole franchisee for French hypermarket chain, Carrefour, in the GCC. The lead arrangers of the sukuk program are HSBC, Standard Chartered Bank, Dubai Islamic Bank and Abu Dhabi Islamic Bank.
MAF initially was working on a $2 billion conventional bond program, but seems to have opted for a $1 billion sukuk program instead because current market and yield dynamics. Standard & Poor's Ratings Services has assigned a preliminary "BBB" rating to a $1 billion trust certificate program which will be launched by MAF Sukuk Ltd., a special purpose vehicle incorporated in the Cayman Islands.
According to Standard & Poor's, the ratings reflect the group's "satisfactory" business risk profile and its "intermediate" financial profile which takes into account the group's strong operating cash flow generation, absence of a dividend payment, ability to curtail capital expenditure at short notice, and prudent liquidity management.
"MAF Group's business strengths include its high asset quality, a strong management team with a good record of delivering successful greenfield developments, and a longstanding relationship with France-based international food retailer Carrefour S.A.," explained Standard & Poor's in its rating rationale.
The sukuk issuance program which has stimulated expectant excitement by market players and investors is the one planned by Saudi Arabia's General Authority of Civil Aviation (GACA) to finance a planned new SR27 billion ($7.2 billion) international airport in Jeddah.
