Business | Banking

Saudi government-backed sukuk completed

Success with first such instrument expected to open a barrage of Islamic bond issues in the country

  • By Babu Das Augustine, Deputy Business Editor
  • Published: 00:00 February 10, 2012
  • Gulf News

  • Image Credit: Gulf News Archives
  • A Saudi Arabian airlines aircraft on the runway. The sukuk issued to finance the expansion of Jeddah’s international airport was the largest single-tranche sukuk yet.

Dubai: Saudi Arabia on Thursday completed the first government guaranteed sukuk for the General Authority of Civil Aviation (GACA) raising 15 billion Saudi riyals (Dh14.6 billion).

The success of the issue and the competitive profit rate of 2.5 per cent offered on the sukuk is expected to open a barrage of Islamic bond issues in the kingdom.

"As the first sukuk from a government guaranteed entity this deal has significance for the development of the regional sukuk market. Prior to this issuance, issuers priced their new securities against US Treasury bonds — adding a premium for the perceived additional risk," said Walid Khoury, CEO of HSBC Saudi Arabia.

HSBC acted as the sole lead manager and bookrunner, sukuk arranger, Sharia coordinator, sukuk holders' agent and payment administrator. With no ‘risk free' local benchmark, it was difficult to use a local reference point. "In effect this issuance establishes a local pricing point for future sukuk," said Khoury.

This deal was three-and-a-half times oversubscribed with strong demand from banks, sovereign funds, pension agencies, insurance companies and corporates.

The sukuk raises $4 billion at a profit rate of 2.5 per cent. This is only around half a per cent more than US Treasury notes.

Largest yet

The sukuk issued to fin-ance the expansion of Jeddah's international airport was the largest single-tranche sukuk yet. Additionally it is also billed as the largest sovereign guaranteed issuance in emerging markets in the last ten years.

"Many sukuk of this size are issued in multiple tranches, with different prices and dates of maturity. However, this sukuk has been launched as one single issuance, and in doing so has become the largest single-tranche sukuk ever issued globally," said Fahad Al Saif, Head of Debt Capital Markets, HSBC Saudi Arabia.

The elevated status of the GACA sukuk as a liquidity instrument is understood to have helped its huge success. The issuance is the first sukuk approved by the Saudi Arabian Monetary Agency (Sama) to be eligible for repo arrangements and has also been assigned zero per cent risk weighting for capital adequacy calculation purpose.

Investment bankers expect the success of GACA bond issue to prompt a number of sovereign related entities and corporates to take bond or sukuk route to diversify their funding sources. The increased issuance is also expected to create a vibrant and liquid bond market in Saudi Arabia.

"We foresee that this issuance will open the door for other similar type of issuances in the coming years. The government may choose to finance more projects this way to better utilise the excess liquidity in the system and to also improve the performance and execution of these projects," said Khoury.

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