SUKUK

Investors should value fundamentals over headline risks

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A commentary by Mohammed Khnifer, a debt capital markets professional at a supranational banking institution, following Saudi Arabia’s $7.5 billion bond issuance
THURSDAY 24, JANUARY 2019

Sukuk and conventional financing share the same features that could make them vulnerable to global factors. One thing to note is that international investors should consider economic fundamentals over the headline risks that spur from the Middle East.

In our region, active portfolio managers, who are on the ground, would tend to benefit more than the passive one (this is due to the fact most new investors to our region can easily be moved by negative sentiments and geopolitical risk). And when that happens, we can see “smart money” coming in and picking up certain GCC bonds or Sukuk at great value.

 Such “great values” can also been seen in the primary market too. In January 2019, Saudi Arabia surprised emerging markets with a bond sale of over $7 billion (with premium of 20 to 30 bps over the 10 years tranche). Despite the negative media coverage in the early hours of the issuance and the pressure that was put on investors, Saudi Arabia lured in a whopping $27.5 billion in orders.

Foreign investors bought almost 97 per cent of the issuance. Indeed, the sheer number of foreign investors speaks volumes about the strong economic fundamentals of the issuer who closed the trade in less than seven hours—a potential market record for emerging markets.

Geographical distribution for Tranche 1 (bond due in 2029): US – 40 per cent; UK – 26 per cent; Asia – 18 per cent; Europe – 13 per cent; and Middle East three per cent. Geographical distribution for Tranche 2 (note due in 2050): US – 45 per cent; UK – 23 per cent; Asia – 17 per cent; Europe – 13 per cent; and Middle East – two per cent.

2018 Overview

Bond and Sukuk issuance in the GCC totalled at $77 billion as of 10 December 2018, down from $85 billion in the prioryear, according to data from Emirates NBD. Some GCC securities (worth nearly $340 billion) would benefit from the gradual inclusion by end of January 2019 to JP Morgan Emerging Market Bond Index. The Middle East’s share of global emerging markets issuance climbed from 12.5 per cent to 14.8 per cent by end of 2018

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