Dubai: HSBC Holdings Plc is in talks to bring more Saudi Arabian companies to the bond market as growth in the biggest Arab economy helps the bank fend off rivals for the region’s top underwriter title, a bank executive said.

Issuers in the world’s largest oil exporter have sold a record $8 billion of Islamic bonds this year, more than any Arab country, data compiled by Bloomberg show. London-based HSBC helped arrange $6.4 billion of sukuk in the kingdom, accounting for 70 per cent of its Middle East bond business. The bank was sole underwriter for a 15 billion-riyal ($4 billion) offering in January by the General Authority of Civil Aviation to fund an airport in the Red Sea port city of Jeddah.

“We do have still a very strong pipeline” in the kingdom, Georges Elhedery, Dubai-based head of global markets for the Middle East and North Africa at HSBC, said in a phone interview on September 11. “We’re hoping to bring more debut sukuk issuers in Saudi as well as more regular issuers like banks” to the market, he said, declining to name potential issuers.

A $514 billion government spending programme will help Saudi non-oil industries expand 6.5 per cent in 2012, the second-fastest pace in the six-nation Gulf Cooperation Council after Qatar, according to International Monetary Fund forecasts. Issuers including Almarai Co., the kingdom’s biggest publicly traded food producer, and Saudi Hollandi Bank have announced plans to sell bonds that comply with Islam’s ban on paying interest as global sales of the debt almost doubled this year.

Credit risk drop

Saudi Arabia’s credit risk declined as the economy expands about five times faster than the Group of 10 developed nations. Five-year credit default swaps, a measure of investor confidence, tumbled 42 basis points, or 0.42 percentage point, this year to 86 on September 14, the lowest since January 2011, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That’s the lowest in the Middle East.

Demand for financing has lifted the three-month Saudi interbank offered rate, known as Saibor and the benchmark used by banks to price debt, up 17 basis points this year to 0.95313 per cent on Monday, near the highest since 2009, data compiled by Bloomberg show. The rate’s spread against the equivalent US dollar rate widened to 57 basis points yesterday, compared with 20 at the end of 2011, the data show.

Saudi sovereign debt sales are limited to weekly offerings of treasury bills on Mondays. The yield on one-year bills climbed at the last two auctions to 0.59334 per cent.

Top underwriter

HSBC, the Middle East’s top bond underwriter since 2010, has helped arrange almost a third of the region’s $30 billion of bond sales this year, data compiled by Bloomberg show. London- based Standard Chartered Plc, which generates most of its revenue from emerging markets, comes in second with 9.5 per cent market share, followed by Deutsche Bank AG.

HSBC’s dominance in the kingdom is largely due to its ownership of 40 per cent in Riyadh-based Saudi British Bank, Viswanathan Shankar, Standard Chartered’s chief executive officer for Middle East, Europe, Africa and the Americas, said in April. Standard Chartered has requested a full Saudi banking license and currently operates a capital markets office in the kingdom.

Record-low yields

The country of about 28 million people is rated AA- at Standard & Poor’s, the fourth-highest investment grade and one level below Qatar, the world’s biggest exporter of liquefied natural gas, and Abu Dhabi.

HSBC’s pipeline for the rest of the region is “very strong for sukuk and bonds,” Elhedery said. Middle East debt yields are at record lows, which may entice more issuers to sell debt after two months of “very limited issuance,” he said. No Islamic bond sales took place in the GCC in August, data compiled by Bloomberg show.

The bank helped arrange Qatar’s $4 billion debut sukuk in July as the nation hosting the 2022 soccer World Cup builds stadiums, roads and a metro line. HSBC also arranged offerings for Emirates NBD PJSC and National Bank of Abu Dhabi PJSC, the UAE’s two biggest banks.

The average yield on the regional debt dropped 123 basis points, or 1.23 percentage points, this year to a record 3.85 per cent on September 14, according to HSBC/Nasdaq Dubai Middle East US Dollar Sukuk/Bond Index.

Riyal debt

“Clearly it’s a very attractive time for issuers to come out and satisfy pent up demand from investors, who face limited supply for good quality paper,” Elhedery said.

While most Saudi sukuk this year were denominated in riyals, HSBC is working with “larger corporations and banks to tap the dollar market and widen the investor base,” Elhedery said. HSBC managed Saudi Electricity Co.’s $1.75 billion Islamic bond sale in March along with Deutsche Bank. Banque Saudi Fransi, part owned by Credit Agricole SA, also sold $750 million of dollar-denominated debt in May.

Riyal debt will continue to dominate. The civil aviation authority said in May it plans to issue a second tranche of sukuk to fund a Riyadh airport expansion. Kingdom Holding Co., the investment company controlled by billionaire Prince Al Waleed Bin Talal, secured shareholder approval in March to sell as much as 3.75 billion riyals in bonds.

“Saudi Arabia remains a riyal story by and large,” Elhedery said.