* GCC sukuk issuance slumped this year
* Conventional bonds more attractive for issuers
* Governments forced to rely more on foreign investors
* Unsatisfied demand to facilitate sukuk issues in 2017
* But secondary market suggests little demand at long end
By Davide Barbuscia and Bernardo Vizcaino
DUBAI/SYDNEY, Dec 22 After slumping in 2016,
issuance of Islamic bonds from the Middle East looks likely to
rebound next year as Gulf states take advantage of unsatisfied
demand, but investors may shun the long end of the curve.
As governments scrambled to cover budget deficits due to low
oil prices this year, they overwhelmingly turned to conventional
debt - a shift from the traditional pattern in which sukuk and
conventional bonds had roughly equal shares of the region's
international bond issuance.
In the first half of 2016, governments in the six-nation
Gulf Cooperation Council raised just $1.1 billion or 5 percent
of their total debt issuance through longer-term sukuk, against
38 percent a year earlier, Moody's estimated. Saudi Arabia's
$17.5 billion debut bond in October was entirely conventional.
Meanwhile, GCC corporate and project-related sukuk issuance
totaled $2.5 billion in the first eight months, up marginally
from $2.3 billion a year ago but down sharply from $5 billion in
2013 and $6.5 billion in 2014, Standard & Poor's estimated.
With cheap oil tightening liquidity in their banking
systems, Gulf governments were forced to rely more on foreign
investors rather than Islamic banks and funds, which pushed them
towards conventional debt.
Also, as oil prices sagged, governments were in a hurry to
raise money and did not want to spend extra time planning sukuk
issues - which tend to be more complex than conventional bonds -
or explaining their intricacies to investors.
Sukuk documentation can vary across the GCC in terms of
structure, legal requirements and compliance with sharia
standards, noted Ruslena Ramli, head of Islamic finance at
Malaysia's RAM Ratings.
"In the GCC, sukuk issuances are typically supported by real
assets. Identifying sufficient assets to support sukuk issuances
may add to the funding timeline and affect the overall financing
UPSWING NEXT YEAR
Issuance may become more normal in 2017. With oil rebounding
and austerity policies in place, GCC governments are somewhat
less pressed for cash and have more time to plan sukuk.
Also, this year's dearth of new sukuk has left unsatisfied
demand among Islamic investors, including banks that need
high-grade sharia-compliant bonds to meet liquidity standards.
"Sukuk are very much in demand and global sukuk issuance is
on an upswing," said Mohieddine Kronfol, chief investment
officer for global sukuk and Middle East fixed income at
Franklin Templeton Investments.
"Going forward we should expect sovereign issues to be less
lumpy and more diverse in format and currency," he said.
Saudi Arabia is believed to be considering an international
sukuk issue in the first quarter of 2017. Bahrain could sell
sovereign sukuk in that period, though the central bank told
Reuters no decision had been made.
Conventional bonds look likely to retain one attraction for
Gulf issuers, however, because long maturities above 10 years
seem more feasible for conventional debt.
"The sukuk market still lacks a significant investor base
for the long end of the curve. Sukuk buyers are traditionally
more involved in five- and 10-year paper," said a Dubai banker.
Saudi Electricity Co (SEC) issued 30-year sukuk in
2013 but secondary market trading in its bonds suggests demand
is weaker for that maturity than for conventional debt.
Its 30-year sukuk is at a premium of 75-80
basis points over the 30-year tranche of the Saudi sovereign
bond, against an initial 50 bps in October.
For shorter tenors, SEC's 2022 and 2023
sukuk are almost flat to Saudi sovereign bonds
maturing in 2021 and 2026.
Given the pricing advantage of conventional paper at the
long end, Riyadh could choose maturities of five and 10 years
for a sukuk issue next year, said Doug Bitcon, head of fixed
income funds and portfolios at Rasmala Investment Bank.
(Editing by Andrew Torchia and Tom Heneghan)