THE NEW YORK TIMES
DUBAI — Saudi Arabia issued its first government-backed Islamic bond this week, for its aviation agency, setting a benchmark for pricing of conventional and Islamic bond issues this year because of its size.
At 15 billion riyals, or $4 billion, it was the largest Islamic bond, or sukuk, ever issued within the kingdom. The sukuk, guaranteed by the Saudi Ministry of Finance, was oversubscribed three times, and the Saudi General Authority for Civil Aviation will use the proceeds to finance the expansion of King Abdulaziz International Airport in Jidda, the second-largest city in Saudi Arabia, after Riyadh.
The 10-year sukuk was sold in the domestic market, available only to Saudis. After months of uncertainty in Gulf capital markets because of the European debt crisis and the Arab Spring, analysts say the success of this sukuk will encourage more companies to come to market.
The last time a sukuk close to this size was sold was in July 2007, when the petrochemical giant Saudi Basic Industries Corp., or Sabic, raised 8 billion riyals.
Over the last three months, the Saudi government has been taking “bold initiatives to empower the Saudi capital markets,” said Mohamed Gouali, managing director and head of investment banking at Al Mal Capital in Dubai. The Saudi capital markets authority, for example, recently allowed foreign companies to be solely or dually listed on the Saudi stock exchange.
“They are now trying to revamp the sukuk capital market,” said Mr. Gouali, who formerly worked at Al Rajhi Bank, the largest Islamic bank in Saudi Arabia. “By starting off the first month of the year with a sukuk of this size, they are sending a strong message to the Saudi market and beyond that the government is ambitious about revitalizing debt markets.”
The fact that Greece, a country near default, successfully issued new three-month and 10-year bonds recently will positively affect the Gulf’s capital markets, he added.
In 2011, Saudi Arabian companies offered five Islamic bond issues worth a total of $2.76 billion, down from $3 billion raised from four sukuk sales in 2010, according to data from Zawya Sukuk Monitor. Over the past few years, the majority were by the largest companies in the kingdom, including Sabic and Saudi Electric. The aviation authority’s sukuk, however, is the first guaranteed by the government.
“It is not a matter of needing liquidity, but the need for a yield curve that will benefit banks which are sitting on a massive amount of liquidity and not lending,” said Yazan Abdeen, a portfolio manager at ING Investment Management in Dubai. “When a sukuk like this is issued, it helps suck up excess liquidity in the banks, which have few alternatives, and set up a yield curve.”
Analysts say that building a yield curve and ramping up the country’s capital markets are the main reasons for a government entity to raise funds through debt.
“It’s not like the government needs to raise money; Saudi has a budget surplus and debt levels have dropped,” said Eric Swats, head of asset management at Rasmala Investments in Dubai. “This could be the beginning of other domestic issues as more issuers come directly to the market.”
Saudi Arabia’s budget for 2012 envisions revenue of 702 billion riyals and spending of 690 billion riyals, according to details made public in December that factor in a modest oil price of $74 a barrel. The previous year’s budget included 580 billion riyals in spending.
“The increased use of capital markets to fund projects makes sense, given the increasing amount of government expenditure,” said Khalid Howladar, an analyst at Moody’s Investors Service in Dubai. The airport authority’s sukuk issue, he said, “is a very positive development for the market and is indeed a benchmark, given the rarity of high-quality sovereign issues.”