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Sukuk seen to constitute big part of Saudi project funding

STC plans to issue SR5 billion sukuk

JEDDAH – A large proportion of Saudi project funding is likely to come from the sukuk market in the near future, Yasir Al-Rumayyan, chief executive officer at Saudi Fransi Capital, told MEED.

“We haven’t seen a lot of capital increases in local banks, so there isn’t a huge jump in lending power. The only logical solution is for companies to issue sukuk,” Al-Rumayyan said.

Based on the backlog of infrastructure-related companies, he expects continued growth in the sukuk market for the next four to five years as Saudi government expenditure drives capital markets growth.

“If you look at the debt capital markets spreads, pricing is very low – even second tier issues are around 150 basis points over Sibor,” he said.

“The sukuk market is developing on all fronts, with the number of issuers increasing and [dairy food company] Almarai completing the country’s first perpetual issuance last year.”

With the exception of banks that may need foreign currency, he says issuers are likely to continue issuing in riyals amid solid demand from local investors as secondary market activity is low, indicating that there is not enough issuance in the market.

Al-Rumayyan added that 2014 also promises to become a record year for initial public offerings.

While equity capital markets transactions totaled more than SR12 billion ($3.2 billion) in 2012, the figure dropped to less than SR2 billion in 2013. But 2014 promises to be more in line with 2012 as market conditions have picked up, he said.

“What will help is that the regulator has indicated to be more hands off when it comes to the valuation of companies, which will allow market forces to determine the price range.”

Saudi Fransi Capital is currently working on an offering in the hotels and amusement industry meant to raise at least SR800 million. It is also advising on Acwa Power’s flotation, which is planned to open by the end of the year, and Dr Suleiman Alhabib Medical Group, which may launch this or early next year.

Meanwhile, Saudi Telecom Company has established a program that could see it issue sukuk worth up to SR5 billion ($1.3 billion).

The Kingdom’s largest telecommunications operator said in a statement that it may issue sukuk “from time to time” through local private placements.

STC’s profit rose 54 percent year-on-year to SR2.39 billion in the first quarter of 2014 after its decision to minimize losses from foreign units.

The company sold its Indonesian subsidiary Axis at the end of 2013, followed by a decision in January to exclude Aircel’s losses from its financial results.

STC has plans to strengthen its presence in Saudi Arabia as it continues to face competition from rivals Mobily and Zain Saudi Arabia. It is enhancing the coverage of its 3G and 3.5G networks so it can provide services to more than 96 percent of residential areas and is also deploying a 4G network across the Kingdom.

Separately, Islamic Development Bank (IDB) plans to issue a benchmark-sized Islamic bond or sukuk in around May next year, said the bank’s President Ahmad Mohamed Ali.

In February, IDB, which has a top-notch AAA rating, priced a $1.5 billion, five-year sukuk, its largest ever Islamic bond.

“The new issue will for sure be close to this year’s issue … maybe a little more or a little less,” Ali said on the sidelines of an economic conference in the Bosnian capital Sarajevo.

“We are planning to go to the market every year but the amount will depend on different factors. We will inspect the needs of the bank and the conditions on the market,” Ali said.

He said that IDB was considering whether to guarantee Tunisia’s proposed 700 million dinar ($431.79 million) debut sukuk.

The Tunisian issue is aimed at helping the North African economy recover after being hit by the 2011 uprising.

The issue had been planned for April or May but Tunisia’s central bank governor has said it was complex and was likely to take longer. “No decision has been taken yet,” said Ali.

He added that IDB’s insurance arm, the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), is also debating whether to extend a sukuk insurance product to boost the credit rating of Tunisia’s sukuk.

ICIEC launched the insurance product last year, viewing that the insurance policy could help sovereign issuers tap into strong investor demand for investment-grade sukuk.

“It is a new product. This is just a proposal and it is still under consideration,” Ali said.

But he said that IDB might consider subscribing to the Tunisian sukuk. “If Tunisia did issue a sukuk, IDB will definitely consider participating in such an issue because it is our policy to support our member countries in issuing their sukuk,” Ali said.

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