Middle East borrowers launching sukuk issues in the first quarter of 2008 will have to price their bonds higher despite the region’s debt market and fundamentals looking healthy, according to senior executives at Moody’s Investor Service and Morgan Stanley.
Large sukuk issues, which attract international investors often from outside the region, have been impacted by the global credit crisis since June. The region has seen price spreads of Islamic bonds double in November to hit 130 basis points (bps) above the London interbank offered rate (Libor) from an average 60-70bps before June.
“Local liquidity remains strong, but those issuers wishing to attract international investors are paying up to 80bps more today than they were six months ago. However, the region remains attractive and the fundamentals are sound, so issuers have had uninterrupted access to the bond markets, despite wider spreads,” said Philipp Lotter, Vice-President, Moody’s Middle East.
For the Jebel Ali Free Zone (Jafza) $2 billion (Dh7.34bn) dirham-denominated sukuk issued last month, the price offered was 130bps above Libor. While some have viewed the pricing of 130bps for the Jafza bond as being slightly on the higher side, analysts have expressed this to be reasonable in the present market conditions.
“It is safe to say there is no immediate prospect of levels shifting down to June 2007 pricing. Issuers will need to appreciate that the days of cheap debt may have been in the past and move on,” said Yavar Moini, executive director at Morgan Stanley.
In a clear indication of widening spreads, a comparison of the Dubai International Financial Centre issue launched in June with the Jafza sukuk shows that despite carrying the same credit rating – which implies the same credit risk – the Jafza bond was priced about 130bps over Libor while the former was priced about 37.5bps above Libor.
“While the Gulf markets have not been directly affected by the global credit crisis, they have felt the indirect repercussions from widening spreads and more expensive borrowing costs,” said Lotter. “Most sukuk issued in 2007 have widened in line with the market. To a degree, this is no longer reflective of the true risk profile of many of the companies, in particular those that are government owned. DP World or Dubai Holding, for instance, are strong credits with government backing,” he said.
Among the regional victims of the credit market turmoil was Dana Gas, whose debt issue was postponed from July to October after the issuer and lead manager found it would face roadblocks if launched in July. The issue was relaunched in October with a coupon rate of 8.5 per cent when it raised $875 million (Dh3.21bn) and thereafter the size was raised to $1bn (Dh3.67bn). The structuring of the convertible bond is believed to have played a key role in the success of the Dana bond. “The appropriate time to issue is also a function of the type of sukuk – straight versus equity linked – such as a convertible. The latter instruments continue to find a ready market among issuers and investors and in times of volatility they provide a cheaper cost of funding to issuers and enable investors to benefit from a potential upside from the equity takeup,” said Moini.
Nearly $10bn (Dh367bn) worth of sukuk financing is expected to be relaunched in 2008 after being postponed due to the liquidity crunch, according to Moody’s.