DUBAI — Saudi Arabia’s bond market is taking off as local companies rush to issue debt — though low returns are keeping foreign investors on the sidelines.
Traditionally, Saudi companies and other entities have relied on bank loans and retained earnings to finance their expansion. For debt market traders, that has made the Arab world’s biggest economy a case of unfulfilled potential.
In recent months, that pattern has started to change as companies become more familiar with bonds, a wide range of investors demand them, and banks bump up against the limits of how much they can lend to individual companies.
This has caused a burst of riyal-denominated debt issuance. In Saudi Arabia, such issuance is entirely in the form of Islamic bonds, or sukuk, which are structured to obey Islam’s ban on interest and instead pay returns on assets.
“Saudi Arabia had traditionally been considered the sleeping giant of regional debt capital markets, but this has certainly changed in the past 18 months as we have seen an upsurge in riyal sukuk issuance,” said Stuart Ure, partner at law firm Clifford Chance in Dubai.
Bank loans are still growing rapidly in Saudi Arabia because of strong economic growth; lending to the private sector climbed 15.6 percent from a year earlier in February to SR1.02 trillion ($272 billion).
But sukuk issuance is now expanding much faster. Last year about SR27.2 billion worth of riyal-denominated sukuk were issued, according to HSBC, up from 11.3 billion in 2011. In the first quarter of this year, SR10.3 billion were issued.
Three sukuk deals have closed in the past week alone: a SR1.3-billion deal from construction firm Saudi Binladin Group, SR1.3 billion from dairy firm Almarai Co, and SR7.5 billion from Sadara Chemical Co, a venture between Saudi Aramco and Dow Chemical.
Some Saudi banks have run up against their internal lending limits for companies, an issue which is particularly acute for firms such as Saudi Binladin, which require large amounts of finance to undertake construction projects. This is pushing some companies towards sukuk.
At the same time, sukuk have advantages for companies; they often carry longer tenors than the short maturities commonly offered on Saudi bank loans, and they allow the borrower to diversify its funding sources. “Of the various advantages of going for a sukuk, some of the key ones are a massive pool of liquidity to tap into and the diversity of funding sources,” said Fahad Al-Saif, head of capital markets and corporate finance at HSBC Saudi Arabia.
As Saudi regulators press firms to become more transparent, companies have gradually become more willing to disclose the data necessary to conduct sukuk issues. Growing familiarity with the instruments has made issuers more comfortable.
Ure dated the sukuk boom back to the successful issue in January last year of a mammoth SR15 billion sukuk by the government’s General Authority of Civil Aviation (GACA).
New entrants to the market may include National Shipping Co of Saudi Arabia (Bahri), according to market sources, and Marafiq, a utility services provider to two industrial cities in Saudi Arabia, which has confirmed it is considering an issue.
Meanwhile, Saudi investment funds and insurers, some of them cash-rich in a booming economy, are keen to put sukuk in their portfolios and willing to accept low returns to obtain them - making them financially attractive for issuers. – Reuters