Gulf governments, spending their oil wealth on $1tn of projects from airports to soccer stadiums, will fuel a second year of record Islamic bond sales in 2013 as private companies remain reliant on bank loans.
Sukuk issuance by governments and state-linked companies in the six-nation Gulf Co-operation Council made up more than 80% of the $20bn of notes sold this year, data compiled by Bloomberg shows. That is about 10 percentage points more than in Malaysia, home to the biggest global sukuk market.
“This trend will continue into 2013, if not increase, because the GCC region is growing rapidly and needs more spending to cope with their investment plans,” Samer Mardini, vice president of fixed-income and Islamic finance products at Dubai-based Markets Ltd, said by phone this week. “The GCC is booming, there are a lot of infrastructure projects here and there, and they need a lot of money.”
Saudi Arabia, the world’s top oil exporter, and its neighbours favour Shariah-compliant debt as they satiate demand among Muslim investors that has pushed borrowing costs to all-time lows. Family-run businesses, which account for as many as 90% of Middle Eastern companies, are discouraged from debt markets by the need to attain a credit rating and improve disclosure, especially since banks don’t apply the same scrutiny for loans, according to Mashreq Capital DIFC Ltd.
The world’s biggest sukuk sales of the year were two $4bn issuances from Saudi Arabia’s aviation authority and Qatar, which is set to host the 2022 soccer World Cup.
Only a handful of private businesses have ventured to the sukuk market to finance their expansion as regional economies pick up. They have opted instead to pursue financing from banks, with credit growth to private businesses exceeded 15% in Saudi Arabia and Qatar.
Syndicated lending by Saudi Arabian banks has more than doubled in 2012 as companies fund projects, according to data compiled by Bloomberg.
“Family-owned businesses or privately held businesses haven’t to a large extent embraced those kind of things like corporate governance and disclosure and transparency,” said Abdul Kadir Hussain, Mashreq Capital’s Dubai-based chief executive officer, said by phone on Tuesday. “Right now, it’s still a bank-driven market.”
Syndicated lending has slowed overall in the Middle East and North Africa, falling 5% this year to $28.5bn, taking the total below regional bond sales for the first time since 2009. Issuances of sukuk and non-Islamic notes jumped 58% to $36bn in the same period, data compiled by Bloomberg show.
Private companies are testing out the bond market. Majid Al Futtaim Holding, a Dubai-based family business operating malls and hotels, raised $400mn in January of sukuk at a return, or coupon, of 5.85%. The company, which set up a $1bn Islamic bond programme, secured credit ratings of BBB from Standard & Poor’s and Fitch Ratings, the second-lowest investment grade at both companies.
“Change is coming and MAF is a great example,” Hussain said. “MAF went through the trouble of getting a rating and issuing sukuk and hopefully that example will be followed by other companies through the region.”
The potential pool of corporate bonds is substantial. Between 75% and 90% of Middle Eastern companies are owned and run by families, according to the Dubai-based Tharawat Family Business Forum, and independent network of Arab family businesses. In Saudi Arabia, the largest Arab economy, four privately held companies raised a record 5bn riyals ($1.3bn) from Shariah-compliant bond sales this year, according to data compiled by Bloomberg.
“As the overall sentiment for GCC credit has improved and investors are hunting for higher yields, private companies will find it easier to access the public debt markets and we may see a modest increase of new paper,” Apostolos Bantis, a credit analyst at Commerzbank in London, said by email.
Still, the tide won’t turn in favour of private businesses quickly as massive infrastructure spending needs of governments dominate supply. Saudi Arabia’s aviation authority, which used proceeds from the January sale for an airport expansion in Jeddah, said in May it planned a second tranche of notes complying with Islam’s ban on interest for another airport in the capital, Riyadh.
“There are few private companies with the ability to access the public debt capital markets,” Bantis said. “The majority of GCC credits with outstanding public debt or with the capacity to easily access the public bond/sukuk markets is dominated by the quasi-sovereign issuers and sovereigns.”