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Strategy Shift

Strategy Shift

Analysts say the next step will be to see an international sukuk of this size open to foreign investors, or a fully sovereign sukuk issuance. With the massive changes over the last few months, analysts are sure to keep an eye on Saudi’s markets.

April 11, 2012 1:46 by



Major changes have swept through Saudi capital markets over the past few months; it all began with a decree that allowed foreign listings on Saudi’s stock exchange, the Tadawul index, last quarter.  This was almost revolutionary in sending a message of openness to the global financial community.  Stocks of foreign companies can now be solely or dually listed on the Tadawul exchange, when in the past, the market had only been open to domestic firms since its inception.

A complementary shift is happening on the debt side, with Saudi’s issue of its first ever quasi-sovereign sukuk, or Islamic bond, in late Janaury.  For the first time, a government entity, rather than a company, is coming to the bond market to raise funds.  Saudi’s General Authority for Civil Aviation, or GACA, raised $15 billion Saudi Riyals, or $4 billion, from the sale of the sukuk. Not just a first for a government entity – this is also the biggest sukuk sale in the kingdom to date.

“The move is not a surprise; though Saudi Arabia is the biggest economy of the Islamic world, it lags far behind countries such as Malaysia when it comes to developing Islamic finance instruments like sukuk,” said Mohamed Gouali, head of investment banking at Al Mal Capital in Dubai, who used to work at Al Rajhi Bank, the largest Islamic bank in Saudi Arabia.  “Since Saudi is facing huge competition in this area, it could no longer afford not to act with an impacting initiative such as this.”

The sukuk, which matures in 2022, was oversubscribed three times, marking the thirst for such an offering by local institutions.  The sukuk was only offered to residents in Saudi Arabia and was not open to foreigners.  Funds will go toward the expansion of the King Abdul Aziz International Airport in Jeddah, which is the largest city after Riyadh in Saudi Arabia.

“We see here singular ambition and commitment from the Saudi government aimed at implementing a large scale benchmark for the sukuk market and revitalizing corporate debt issuance,” said Mr Gouali.  “The strong appetite in the sukuk sale showed by Saudi investors puts an emphasis on the confidence they have for their firms and capital markets.”

By starting the year with a massive sukuk of this size, he also believes it will encourage more Saudi companies to come to the market to raise funds.  After a dry spell in regional bond markets influenced by the instability of the Arab spring and the Eurozone debt crisis, this sukuk sale will also help create a benchmark in terms of pricing and size for other listings this year.

The only sukuk sale that came close to raising this amount took place when the petrochemical company Saudi Basic Industries Corporation, or SABIC, made SAR8 billion ($2.1 billion) in July 2007.

“The new sukuk is a good size that should make it very liquid and help the Islamic banks in particular with their liquidity management,” said Khalid Howladar, an analyst at Moody’s.

Since offerings like this are often few and far between, Islamic banks usually scramble to get a piece of the pie in order to fulfill local mandates, according to analysts.  Saudi banks are usually troubled with the problem of excess liquidity with no place to park and a reluctance to lend.  That contributes to the popularity of this issuance, which was three times oversubscribed.

“There’s a lot of money which sits in the Saudi banking system and can’t leave the Saudi jurisdiction,” said Eric Swats, a partner at Rasmala Investments in Dubai. “There aren’t that many alternatives to invest, so when a domestic issue like this comes to market, it gets taken up pretty quickly.”

The analysts say that an offering like this could be a benchmark that helps set up a yield curve for Saudi’s fragmented bond market.  After all, according to Mr. Swats, this isn’t about the government coming to the market to raise liquidity.  According to a public statement in December, the Saudi government’s budget for 2012 project revenues of SAR702 billion and expenses of SAR690 billion.  A conservative oil price estimate of $74 was used, despite the fact that oil closed at over $100 a barrel at the end of 2010.  Expenditure has been rising, with SAR580 billion spent in 2010.

“It’s not a matter of the government needing money, it’s more about building a yield curve,” said Yazan Abdeen, an asset manager at ING Investment Management in Dubai.  “An issuance likes this also sucks up excess liquidity from local banks.”

Analysts concur that the hope is for more companies to turn to the bond market to raise funds.  Last year, five sukuk valuing $2.76 were issued by local companies, compared to $3 billion raised from four Islamic bond issuances in 2010.  The companies issuing sukuk included SABIC and the Saudi Electric company.  The sukuk issued by GACA, on the other hand, is larger than the total of each year and is backed by the government through a guarantee by the Ministry of Finance.

The bond market is showing signs of improvement globally, as even debt-ridden Greece was able to raise funds early this year through the issuance of a short term 3 month bond and a longer term 10 year bond.  This should have a positive influence on Gulf capital markets, according to analysts.

“Capital markets are, at least psychologically, interrelated,” said Mr. Gouali.  “The fact that a country near default like Greece has been successful in issuing bonds shows that there is a good perception over measures taken to fix debt problems there, which will encourage the region’s bond and equity markets.”

Analysts say the next step will be to see an international sukuk of this size open to foreign investors, or a fully sovereign sukuk issuance.   With the massive changes over the last few months, analysts are sure to keep an eye on Saudi’s markets.

“Saudi Arabia is witnessing a transformation of its local capital markets,” said Mr. Gouali.  “They are taking proactive steps to improve debt and equity markets.  We are watching them reshape the markets and it’s an exciting time.”

First Published in TRENDS



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