Dubai: Islamic syndicated lending in Europe, the Middle East and Africa rose to a four-year high in 2012 as companies from Dubai’s DIFC Investments LLC to Saudi Arabia’s Etihad Etisalat take advantage of falling borrowing costs.
Shariah-compliant transactions have climbed to $8.37 billion (Dh30.74 billion) this year, led by Etihad Etisalat’s 10 billion-riyal ($2.67 billion) deal in February, according to data compiled by Bloomberg. State-controlled DIFC Investments raised $1.04 billion to help settle a $1.25 billion Islamic bond. This year’s lending compares with $5.2 billion in the year-earlier period and $11.9 billion for the first seven months of 2008, before the real-estate crash shut the market. Non-Islamic loans from the region declined 40 per cent this year to $434 billion.
The increase in syndicated transactions parallels the development of the Islamic bond market in an industry that is set to expand to $2.8 trillion by 2015, according to the Kuala Lumpur-based Islamic Financial Services Board. The three-month London-interbank offered rate, which is typically used as a benchmark for dollar-denominated debt, fell to 0.443 per cent yesterday, the lowest in almost nine months.
“The increase in transaction volumes has been mainly on account of refinancings for Dubai-based entities such as DIFC Investments as well as maturing syndicated facilities of Turkish participation banks,” Dubai-based Ahsan Ali, head of Islamic origination at Standard Chartered Plc, said by email July 29. For the rest of 2012, “the bulk of the business is expected to come from the UAE and Saudi Arabia, with a smaller proportion also coming from Turkey,” he said.
Rate outlook
Dubai, the second-largest shaikhdom in the UAE, and its entities have about $15 billion of debt maturing this year, according to International Monetary Fund estimates. State-controlled companies including Dubai Holding LLC and Drydocks World LLC are in talks with lenders to restructure debt.
In Saudi Arabia, the world’s top oil exporter, banks are looking to finance projects and meet rising demand for loans as the government plans to invest $500 billion in industry, infrastructure and housing. Albaraka Turk Katilim Bankasi AS, the Turkish unit of Bahrain’s Albaraka Banking Group, which has never sold sukuk, is seeking to raise $250 million from an Islamic facility to refinance $350 million of debt.
‘Evolutionary process’
“With syndicated facilities, there’s no public disclosure of financial information,” Abdul Kadir Hussain, chief executive officer of Mashreq Capital DIFC Ltd, said in a telephone interview July 31. “Some companies aren’t willing to disclose all their financials, so they may just prefer doing a private deal with a group of three or four banks.”
The easing of monetary conditions in the US and Europe have supported growth in Islamic syndicated transactions and bonds as companies take advantage of lower funding costs. The Federal Reserve has pledged to keep interest rates near zero until late 2014, while the European Central Bank cut its benchmark rate to a record low of 0.75 per cent July 5 as the region’s sovereign debt crisis threatens to drive the euro region into recession. The Fed will conclude a two-day meeting today on monetary policy.
Still, growth is syndicated deals may slow as the sukuk market attracts more issuers.
“It’s an evolutionary process,” Mashreq’s Hussain said. “As the sukuk market becomes more accessible to borrowers, you’ll see more and more issuers become less dependent on banks,” he said, citing Majid Al Futtaim Holding LLC.
Record sales
Majid Al Futtaim, the Dubai-based operator of malls and hotels in the Middle East, sold Islamic bonds for the first time in January when it raised $400 million. Previously the company relied mostly on loans for financing, including $1 billion from a group of banks last year, according to data compiled by Bloomberg.
Shariah-compliant bond sales in the Persian Gulf have surged to a record $17.4 billion this year, beating the 2007 total of $16.2 billion, according to data compiled by Bloomberg. The average yield on Gulf sukuk, which pay returns based on assets to comply with Islam’s ban on interest, fell to 3.38 per cent yesterday, the lowest since January 2005, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index.
The yield on Dubai’s 6.396 per cent Islamic bonds due November 2014 declined 232 basis points this year to 3.25 per cent today. The rate had retreated to a record 3.23 per cent July 17. The premium investors demand to hold the emirate’s notes over Malaysia’s 3.928 per cent sukuk maturing in June 2015 dropped 144 basis points, or 1.44 percentage points, to 143. It fell to a record 142 July 30.
Retrenchment ‘mode’
With banks in Europe scaling back their financing deals as the region’s debt crisis worsens, lenders from the Middle East and North Africa have stepped in to fill the void. Spain and Cyprus have joined three other euro-region countries, Greece, Ireland and Portugal, in asking for aid.
“The weak activity in Europe provides an opportunity for Islamic banks to step up and fill the gap,” Nick Stadtmiller, the head of fixed-income research in Dubai at Emirates NBD PJSC, the UAE’s biggest bank, said in a telephone interview July 31. “European banks have been in retrenchment mode reducing the supply of credit available from Europe. At the same time weak activity in Europe means that banks have few investment opportunities there.”
Growth lures
Nine of the top 10 banks that helped arrange Islamic syndicated facilities this year in the EMEA region are based in the six-nation Gulf Cooperation Council, which includes Saudi Arabia, the UAE and Qatar, according to data compiled by Bloomberg.
Economic growth in the Middle East and North Africa may reach 5.5 per cent this year, compared with a contraction of 0.3 per cent for the 17-nation euro area, the IMF said last month.
For the rest of this year, Standard Chartered’s Ali said he expects growth in Islamic lending to continue. You’ll see the “closing of some of the big ticket deals currently in the market, including project financing deals,” he said.
