Interpreting Middle East Economic News and Analyzing Market Trends

Cheap debt leads to a rush to issue Sukuk

Record low interest rates around the world has fueled a rush to issue more and more debt.  Emerging markets have been key beneficiaries of this cheap debt (see older post on Sukuk and Emerging Market Debt).  The sukuk market has also been one of the key beneficiaries of cheap debt.  Here’s a recent article from The National:

Dubai Electricity and Water Authority (Dewa) will probably pay almost 50 per cent less to sell debt than it did almost three years ago after borrowing costs plunged four times more than global peers amid a pick up in power demand.

The state-owned company hired six banks to raise as much as US$1 billion from the sale of Islamic bonds, a banker familiar with the deal said January 31. Dewa, which has investment-grade ratings at Moody’s Investors Service and Standard & Poor’s, will probably pay about 4 per cent on 10-year bonds, according to Commerzbank and Mashreq Capital DIFC, which are not involved in the sale. It sold similar-maturity notes in October 2010 at 7.375 per cent.

Dewa is coming to market after the Dubai government, which is unrated, sold 10-year sukuk last month at a 40 per cent discount to its previous sale. An economic recovery in the city is spurring demand for power and water that helped boost Dewa’s revenue by 7 per cent in 2012.

Read the full article from The National.

The UAE is one of the leading markets for US dollar sukuk issuance since it relies on outside investors to meet its financing needs.  Qatar also relies on outside investors to fund its projects, but it has not been as active as the UAE when it comes to sukuk.  Saudi Arabia and Kuwait tend to rely on internal funding or issuing sukuk in local currency.  Turkey, on the other hand, has only recently jumped into the sukuk market.  Here’s more from Reuters:

Strong investor demand and a need to improve capital adequacy ratios are causing Turkey’s Islamic banks to consider issuing subordinated sukuk, bankers and analysts say.

Ibrahim Oguducu, head of the financial institutions business at Bank Asya, the country’s largest Islamic bank, said longer-tenor subordinated sukuk would help balance mismatches between the maturities of banks’ liabilities and assets, while diversifying their funding sources.

“A public subordinated sukuk transaction would definitely attract more investor appetite than murabaha,” said Oguducu, declining to say whether his bank specifically was considering such an issue.

Turkey’s four Islamic banks have so far issued only two sukuk; both were from Kuveyt Turk, which is 62 percent owned by Kuwait Finance House and raised a total of $450 million in 2010 and 2011.

That is likely to change soon. Bank Asya said in December that it was finalising a 100-150 million lira sukuk issue and also planned a $200-300 million dollar-denominated sukuk in the next two or three months.

Officials at Al Baraka Turk, a unit of Bahraini lender Al Baraka, have been talking about a $200 million sukuk issue for over a year.

The Turkish government’s landmark issue last September of a $1.5 billion sukuk, which drew massive demand, may be the trigger for such plans finally to go ahead.

Read the full article from Reuters.

Turkey has only begun tapping into the sukuk market, the pace should accelerate throughout the year.  GCC markets, the UAE and Saudi Arabia in particular, are expected to come out with several large issues over the course of 2013.  It seems that this year will be another record year for the sukuk market.