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Watching the significant sukuk rally

/ 25 October 2010

Sukuk financing has made a notable comeback, according to a latest study by the National Commercial Bank, or NCB.

It said that the global sukuk market had recovered last year after being pummeled by the financial crisis in 2008, posting a 36 per cent year-on-year increase after raising $19.1 billion, higher than $15.5 billion recorded in 2008. The Kingdom maintained its third-place ranking for the fourth year in a row, after Malaysia and the UAE, as its four issuances collected a combined $3.1 billion in 2009, a 66 per cent annual gain over 2008 figure.

At a time, when governmental institutions topped private sector entities in terms of issuances on a global scale in 2009, the Saudi corporate sector was the dominant player, with three issuances from Saudi Electricity Company (SEC), Saudi Hollandi Bank (SHB), and Dar Al Arkan. The fourth was a quasi sovereign issue by the Islamic Development Bank.

“Interestingly, ailing confidence did not bring to a standstill the strong interest from investors, especially after the default on two Gulf Cooperation Council sukuk last year by one family business in the Kingdom and Investment Dar in Kuwait as well as the close call on a sukuk issued by Dubai World,” the report said.

“Oversubscription was even the norm, with SHB’s SR725 million sukuk attracting more than SR11.3 billion, a 14 times oversubscription that reduced the offered rate below the initial pricing target. In addition, the SEC was able to price its SR7 billion issuance at 95 bps above SAIBOR, which is far below a similar sukuk issued in mid 2009 at 160 bps above SAIBOR,” the NCB report said, and added, “we believe that sukuk issuance will rise again this year.”

The report gave the following reasons. First, sukuk issuance offers an alternative source of long-term funding, especially at a time when bank lending is still constrained. Second, trading on the secondary market for sukuk, albeit small, had risen significantly of late after a slow start since inception in June 2009, with the value of trades in the first half of 2010 crossing SR400 million mark compared to just SR27 million in 2009. Third, there are seven announced issuances worth more than $2 billion that are in the pipeline for this year, which would complement the three deals worth $2.50 billion that have already been finalised by Dar Al Arkan, Saudi Binladin, and the SEC.

“We believe the continued issuance of sukuks is positive from a macro perspective since the increase in the size of issued sukuk gradually boosts sukuk market liquidity and allows for timely market pricing of risk, a critical input in economic policy formulation,” it said.

GUINEA: Sukuk Al Amanah Li Al Istithmar, or Sukuk ALIM — issued in July by Cagamas Berhad, the National Mortgage Corporation of Malaysia and a leading securitisation house, which was developed in collaboration with Al Rajhi Bank of Saudi Arabia — took over a year to structure and was issued under Cagamas’s RM5 billion Islamic Commercial Paper and Islamic Medium Term Note Programmes. It has been hailed as “first-of-its-kind,” “innovative” and one which would supposedly satisfy investors from a shariah compliance point of view bridging Asia and the Middle East. But, experts say, to what extent Middle East investors become aware of Malaysian domestic risk, even that of an AAA-rated quasi-sovereign solid mortgage corporation, remains to be seen. They say the cross-border information flow between Malaysia and the GCC countries in particular, though improved over the last few years, remains stolid and piecemeal. The perception too of Malaysian risk by most GCC financial institutions, investment funds and sovereign wealth funds remain non-existent, because it hardly features on the investment radar of these funds and institutions.

The outward investment flow of the GCC is largely still US and Eurocentric, albeit some of this flow has gone to Japan, China, India and Brazil and some is returning home to the region in the wake of the global financial crisis.

Views expressed by the author are his own and do not reflect the newspaper’s policy.

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