Islamic bond sales in Saudi Arabia are dominating issuance in the Gulf Cooperation Council, driven by local demand, as companies in other countries hold off on concern the U.S. Federal Reserve will slow asset purchases.
Almarai Co., the Riyadh-based foodmaker, said last week it would meet investors to privately place a 1.7 billion-riyal ($453 million) perpetual sukuk, the first sale in the GCC since July 10. Saudi entities have sold more than 60 percent of all Islamic bonds in the region this year, compared with 43 percent in 2012, according to data compiled by Bloomberg.
Saudi Arabia’s economy, the largest in the six-nation GCC, has grown an average 7.6 percent in the three years to 2012 as the government pursues an expansionary fiscal policy in a bid to avoid the unrest seen in countries including Bahrain and Tunisia during the so-called Arab Spring. GCC sukuk sales made up 46 percent of global sales last year as a record $46.4 billion of Islamic bonds were issued. Concern the Fed could start reducing its quantitative easing measures this month prompted a surge in global borrowing costs.
“Given global conditions and Saudi liquidity, it’s safer to stay domestic,” Michael Grifferty, president of the Gulf Bond and Sukuk Association, said by phone Sept. 5. “It would take real stomach to come into the emerging market with an issue right now. There is a case to be made for waiting a little while.”
Average global sukuk yields are at their highest since April 2011, having climbed 148 basis points, or 1.48 percentage points, this year to 4.29 percent on Sept. 6, according to HSBC/Nasdaq Dubai indexes.
U.S. 10-year treasuries breached 3 percent for the first time since July 2011, up from 1.76 percent at the start of the year, as the Fed contemplates a reduction in its $85 billion a month bond-buying program.
“Most issuers planning bonds or sukuk have backed off because of the Fed or other interest rate issues,” Amol Shitole, an analyst at SJS Markets Ltd. in Bangalore, India, said by phone Sept. 5. “The Saudi sukuk market is dominated by domestic issues and strong domestic demand, so there’s no change in direction.”
General Authority of Civil Aviation is said to have hired banks to arrange a local-currency sukuk, according to a banker familiar with the matter. Saudi British Bank plans to sell Islamic bonds by the end of the year, Reuters reported Aug. 26. More than half of Islamic bonds from the kingdom this year are denominated in riyals, data compiled by Bloomberg show.
Sukuk sales from the GCC total $10.8 billion this year compared with $17.7 billion in the same period last year. Bahrain Mumtalakat Holding Co. was the last non-Saudi issuer, raising 150 million ringgit ($45 million) on April 22. Sharjah Islamic Bank PJSC, the United Arab Emirates-based bank, was the last non-Saudi entity to sell a dollar sukuk on April 9.
“It’s a matter of getting used used to a new kind of reality in rates and spreads,” Grifferty said.
“We’ll have a good rest of year, geopolitics permitting.”
Dubai-based airlines Emirates and Fly Dubai said they would consider Islamic bonds to help pay for planes.
Dubai Multi Commodities Center said it may sell sukuk to finance the construction of the world’s tallest commercial tower. Oman’s Tilal Development Co. is completing the country’s first sukuk.
Regional borrowers are unlikely to commit to new transactions until at least the Fed meeting later this month, according to Shitole. Fed officials meet Sept. 17 to 18, and could reduce the asset-purchase program if they decide the U.S. economy has shown substantial improvement.
Dubai Investments PJSC, which holds stakes in over 40 businesses from real estate to glass, delayed a sukuk sale in the second quarter after borrowing costs soared, while a debut issue from Abu Dhabi’s Al Hilal Bank, first expected in the fourth quarter of 2011, has yet to materialize. The bank received ratings from Moody’s Investors Service and Fitch Ratings this week.
“We will have to wait for clarity over the Fed’s plans,” Shitole said. “Once that emerges, we’ll see more regional issuance in the fourth quarter.”