* Investment Corp of Dubai sukuk tighten after issue
* Sets precedent for upcoming regional issues
* 10-year maturity unusual for Islamic bond from Gulf
* Tight spreads drive investors into longer maturities
* Some bankers expect five- and 10-year Saudi sukuk tranches
By Davide Barbuscia
DUBAI, Feb 8 A strong performance by $1 billion
of 10-year Islamic bonds from a Dubai sovereign fund suggests
investors are being driven into longer maturities of Middle
Eastern debt, and could encourage Saudi Arabia to issue 10-year
sukuk later this year.
In late January, Investment Corp of Dubai (ICD) sold sukuk
due in February 2027 with a 5.056 percent yield. The 10-year
maturity was unusual for an Islamic bond from the Gulf, where
most sukuk have had maturities of five or seven years.
ICD’s paper started tightening in the
secondary market right after it was issued, gaining 2.5 points
in price on the first day of trade and has continued to firm.
Institutional investors said tightening credit spreads in
the Gulf, partly due to higher oil prices in the last few
months, were pushing them to look for higher yields, such as
those offered by longer-dated sukuk. The ICD bond’s performance
had set a precedent for upcoming issuance, they said.
“As credit spreads have contracted, regional investors have
been forced to extend their appetite for longer duration assets
in order to generate an economic return on their investments,”
said Doug Bitcon, head of fixed income funds and portfolios at
Dubai's Rasmala Investment Bank.
After a debut sale of $17.5 billion of conventional bonds
last October, the largest emerging market bond sale to date,
bankers say Riyadh is preparing for an international sukuk issue
later this year. ICD's experience may influence its planning.
“ICD’s performance in the secondary market will help Saudi
Arabia with pricing for any future issuance in the sukuk
market,” said Max Wolman, senior investment manager for emerging
market debt at Aberdeen Asset Management.
Some bankers believe the Saudi dollar sukuk could be offered
in two tranches of five and 10 years. Government officials have
said a sovereign debt issue in the international market will be
made this year, but no details have been decided.
Oil prices are a wild card for the Saudi issue because
although higher prices have made it easier for Gulf governments
to sell debt, they have also reduced pressure on governments to
do so because budget deficits have narrowed. Brent oil is around
$55 a barrel, up from last year's average of $45.
Qatar’s finance minister said on Monday that the country
might not issue any international bonds this year because its
fiscal deficit was close to disappearing.
Kuwait, which last year was planning a $10 billion overseas
debt issue and mandated banks to arrange the sale, has still not
gone ahead with an issue and may now reduce its size, portfolio
Nevertheless, Riyadh has projected a $52.8 billion deficit
this year that appears to be based on an oil price near or even
above current levels, so analysts think international debt
issuance will remain necessary.
A sale of sukuk would make sense because it would open up a
new pool of sharia-compliant investors for the Saudi government.
“There’s a big investor base that can only buy sukuk and
would be ready to buy Saudi paper,” said Wolman.
(Editing by Andrew Torchia and Catherine Evans)