Business | Banking

Good demand prompts DIB to launch sukuk

Bond expected to benefit from uptick in confidence towards Dubai

  • Reuters & Bloomberg
  • Published: 00:00 May 23, 2012
  • Gulf News

Dubai : Dubai Islamic Bank has launched a $500 million (Dh1.8 billion), five-year sukuk sale after receiving good demand, a banker aware of the transaction said yesterday.

The launch spread of 365 basis points over mid swaps is tighter than the initial guidance, the banker, who declined to be identified, told Zawya Dow Jones. Deutsche Bank, DIB, Emirates NBD, HSBC and National Bank of Abu Dhabi are helping arrange the Regulation S transaction, after DIB met fixed-income investors in Asia, Middle East and Europe over the past few days. Fitch Ratings last week said it has assigned DIB's $2.5 billion trust certificate issuance program a ‘A 'expected rating.

Several local banks have tapped the markets this year as appetite for the region's debt remains strong despite challenging global market conditions, buoyed by hopes of robust economic growth fueled by high oil prices.

DIB, majority-owned by the Dubai government, released initial price guidance for the Islamic bond at a spread of 375 basis points over midswaps, equating to a profit rate of 4.85 per cent.

The lender is hoping to capitalise on strong regional demand for sukuk to prop up the deal at those price levels, even if investors say they leave little by way of a "sweetener" to attract large orderbooks.

Lead arrangers said yesterday that the deal already had orders of around $1.8 billion. Deutsche Bank, Emirates NBD, HSBC, National Bank of Abu Dhabi and DIB itself are mandated arrangers. "The general trend observed recently of huge support from local investors will continue and the majority of the allocation of the bond will be to Middle Eastern investors," Anas Al Maizi, senior portfolio manager at Royal Capital, said.

He added a cautionary note, saying that market conditions had worsened since the Greek elections, making it difficult for DIB to tighten the pricing if the bank wanted the bond to perform reasonably in the secondary market.

Investor skittishness has been heightened by the prospect of a Greek exit from the Eurozone and some funds may stay on the sidelines, waiting for clarity to emerge on the European debt crisis.

Resilient market

The sukuk market has proved relatively resilient amid the latest phase of Eurozone volatility, and a large majority of regional deals so far this year have opted to take advantage of this format to meet capital raising needs.

Although the imbalance between supply and demand for Islamic bonds allows borrowers to price at tighter levels than conventional issuers, DIB's latest price guidance may appear to offer little for investors, especially when compared to other, similar deals.

"If orders are heading towards $2 billion, it could be because sukuk investors are more comfortable to hold the bank's paper versus a guarantee-structure sukuk, like Tamweel," a regional fixed income trader said, adding he was not convinced by the deal.

"Tamweel 2017s are the best comparable for DIB and, for the same risk, it gives you better value in spread and yield terms," the trader added.

Tamweel 2017s were trading at a z-spread of 415 bps on Monday, but the bonds are not very liquid. The z-spread is a pricing tool which calculates the number of basis points that need to be added to a zero-coupon yield curve to make the bond's discounted cash flows equal the bond's present value.

"It's not an attractive buy at the current spread levels," Eric Swats, head of asset management at Rasmala Investments, said. "The pricing is really tight and despite the latest trend to tighten at final pricing, the issue is not compelling. While there are the Eurozone concerns, the summer is coming in fast and so best to get a deal done as time is running out."

Another fund manager highlighted DIB's high non-performing loans ratio and significant real estate exposure as risk factors.

 Backing tamweel

DIB's last debt markets foray was to back a $300 million sukuk issued by its Islamic mortgage lender subsidiary Tamweel in January, which priced at 400 bps over midswaps.

That sukuk, fully guaranteed by DIB, was bid at a cash price of 101.5 by some local accounts yesterday morning, from 100 levels earlier, indicating that investors see more value in that bond versus the latest DIB issue, for the same risk.

 

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