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16 June 2019
SUKUK

2019’s instrument of choice

Considering current market sentiments, Mohammed Khnifer, debt capital markets banker at a supranational banking institution, makes a qualitative comparison between syndicated loans and fixed income structures.

SHUTTERSTOCK/JOAT


The loan market across GCC is expected to suffer during the rest of this year due to exceptionally excellent market conditions for fixed income instruments. But do not take my word for it. Dealogic data shows that year to date loan volumes across emerging Europe, the Middle East and Africa dropped 62  per cent in 2019 compared with 2018, with 174 deals in 2018 versus 69 ones in 2019.

 The cost of funding on bonds has gone down for borrowers this year. The last two months in Saudi Arabia witnessed borrowers from different sectors: Al Marai, one of the largest regional dairy companies, and Saudi Telecoms Company (STC), entering the Sukuk market.

Some borrowers now have the ability to be aggressive with their pricing in the bond market—STC pursued an aggressive pricing strategy, as Aramco did, with their recent Sukuk issuance and even managed to price lower than the Saudi sovereign ten-year bond issued earlier this year.

We are seeing more appetite for debt capital market activity from blue chips in Saudi Arabia and across the Gulf. The determining factor for selecting debt instrument over a loan is essentially pricing. As we speak right now, the fixed income approach is the right one.

Market conditions are far more attractive because of the Federal Reserve and relative market conditions across secondary trading which allowed some borrowers to be more aggressive with the pricing.

 The second factor is the inclusion of emerging market (EM) borrowers across the GCC into EM indexes (i.e. JPM EM Bond Indexes). Corporates can now benchmark their issuances against sovereigns, and this provides them with more appealing terms.

 Due to there not being enough transactions on the loans side, some domestic banks in Saudi Arabia have changed their approach to meet the guidelines of Vision 2030, which encourages banks to invest in new industries and infrastructure projects. This is why we have seen a trend of increasing lending since the last quarter of 2018 in Kingdom; however, it came on the account of a very thin/tight margin rate.

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