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Saudi Electricity bond gains outpace GCC on scarcity

Utility set to benefit from rising energy consumption, targeted at above 6 per cent

Gulf News

Riyadh: Saudi Electricity Co.’s Islamic bonds returned 67 per cent more than Gulf corporate sukuk, buoyed by a scarcity of Shariah-compliant securities in Saudi Arabia and demand for investment-grade debt.

The state-controlled utility’s 4.211 per cent dollar-denominated notes maturing in April 2022 have gained 9.5 per cent since their debut at the end of March. That compares with a 5.7 per cent return on corporate sukuk from the six-nation Gulf Cooperation Council, the HSBC/Nasdaq Dubai GCC Corporate US Dollar Sukuk Index shows.

The yield on the Saudi Electricity’s notes dropped to a record 3.1 per cent on August 7. The kingdom’s largest power producer is rated the fourth-best investment grade at Standard & Poor’s.

The largest Arab economy, home to about 28 million people, is pushing ahead with a $500 billion investment plan to build infrastructure, develop industries and create jobs. Saudi Electricity is also set to benefit from rising local energy consumption, which Saudi Deputy Oil Mnister Prince Abdul Aziz Bin Salman forecast is increasing as much as 6 per cent a year. The economy is forecast to expand 6 per cent this year, the second-fastest pace in the six-nation GCC after Kuwait and on par with Qatar, according to estimates from the International Monetary Fund.

“Saudi Electricity is sort of up there as one of the most desired issuers,” Jarmo Kotilaine, chief economist at Jeddah-based National Commercial Bank, said by phone on August 9. “It’s a listed company, so it’s pretty well understood what the company profile and strategy is. Of course, the sukuk market itself is still a relatively small market.”

Record sales

Islamic bond sales in Saudi Arabia rose to a record this year as demand outstrips supply. Sukuk offerings jumped to about $8.3 billion, or about 47 per cent of the GCC’s total issuance this year. Overall sales of Islamic debt in the Gulf increased to $17.7 billion this year from $3.8 billion in the year-earlier period.

“There is very strong demand for Saudi credit,” Abdul Wahid Mohammad Al Matar, the head of trading at Riyadh-based Saudi Hollandi Bank, said by e-mail on August 9. “One reason are the limited offerings.”

The state-run General Authority of Civil Aviation sold 15 billion riyals ($4 billion) of Islamic bonds in January. Saudi Electricity raised a combined $1.75 billion from an issue of five- and 10-year sukuk, securities that pay returns on assets to comply Islam’s ban on interest, in March. The company received more than $17.5 billion in bids. The sale also marked the first dollar sukuk since Dar Al Arkan Real Estate Development Co.’s $450 million Islamic bond in February 2010.

Volatile oil

Saudi Arabia, the world’s largest oil exporter, is rated AA- at Standard & Poor’s, on par with China and Japan. The government has no outstanding dollar-denominated debt, according to data compiled by Bloomberg.

Still, Saudi bonds are at risk from volatility in global crude prices and China’s slowing economy, the world’s second- biggest energy consumer after the US. The kingdom depends on oil for about 86 per cent of its revenue.

Oil declined 6 per cent this year to $92.87 a barrel on the New York Mercantile Exchange. Crude fell on August 10 as China’s export growth slowed and the International Energy Agency cut demand forecasts amid signs that the global economic recovery is losing traction.

Bank of England Governor Mervyn King wrote in an article in the Mail on Sunday newspaper published yesterday that even “the rapidly expanding emerging-market economies are slowing, and the problems of the euro area continue with no obvious end in sight.”

Safe haven

Investors deterred by the euro-region debt crisis may seek alternative assets in emerging markets such as Saudi Arabia, which possesses the Middle East’s lowest risk of default, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Saudi credit default swaps were at 103 basis points on Aug. 10, lower than Qatar and Abu Dhabi. Riyadh-based Saudi Electricity is 74 percent owned by the government, according to data compiled by Bloomberg.

“If the euro-zone situation spins out of control, I think the search for safe havens will increase,” Kotilaine said. “The sukuk asset class has established itself. It is seen as an attractive asset class, especially by regional institutional investors. It’s seen as a safe haven.”

Yields drop

Emerging-market debt funds attracted inflows of $720 million in the week ended August 8, Dwight Ingalsbe, managing director of US-based research firm EPFR Global, said last week.

The yield on Dubai’s 6.396 per cent Islamic notes maturing in November 2014 fell 231 basis points, or 2.31 percentage point, so far this year to 3.26 per cent today. The spread investors demand to own Dubai’s sukuk over Malaysia’s 3.928 per cent due June 2015 narrowed to 157 basis points. Malaysia is home to the world’s biggest Islamic bond market.

The yield on Saudi Electricity’s 2.665 per cent sukuk due in April 2017 fell 45 basis points since they started trading in March to 2.02 per cent today, according to prices on Bloomberg. The bonds have returned 2.9 per cent.

Saudi Electricity said last month that its second-quarter profit rose 2 per cent to 1.36 billion riyals. The kingdom plans to double its power-generating capacity in the next decade, Fouad Jwayed Al Sherebi, Saudi Electricity’s executive vice president of generation, said on February 7.

“This kind of quality sukuk will be seen as a desirable part and an important part of the portfolio by many regional institutions,” Kotilaine said.