LONDON, Sept 17 (IFR) - In a market galvanised by central
bank action in the US and in Europe, strong appetite for
emerging market bonds have eroded the pricing advantage enjoyed
by sukuk over conventional paper say origination bankers, at a
time when yield-starved Islamic investors have started to become
The shift might carry significant implications for the sukuk
market, where issuers used to be able to save as much as 40bp by
printing Sharia-compliant bonds as opposed to conventional
notes. Meanwhile, as much as USD19.2bn has been raised so far
this year by borrowers according to S&P.
"The issue price you can achieve in the conventional market
is very aggressive at the moment," said an origination banker in
London. "About a year ago, issuers had a 30bp-40bp advantage by
doing sukuk deals. That's been squeezed down to closer to 10bp
The banker points to Abu Dhabi-based First Gulf Bank's (FGB)
debut sukuk in 2011 as one example of the generous pricing
advantage once enjoyed by the format. Back then, targeting
Islamic investors resulted in a 30-40bps pricing advantage for
the issuer, reckons the banker. "A conventional deal would have
been very unlikely to price so tightly," a European banker
familiar with the transaction told IFR at the time.
By contrast, Dubai property developer Majid al Futtaim's
(MAF) debut sukuk at the end of June this year seems to reveal a
much thinner differential in terms of pricing between Islamic
and conventional formats. "It was primarily a liquidity
advantage," said the banker. "They could have priced a
conventional more or less at the same level."
While the opportunity to tap cash-rich Islamic investors is
encouraging an increasing number of borrowers such as Turkey and
South Africa to make their debut in the sukuk market, issuing
Islamic bonds is not a seamless exercise, especially for names
looking at a one-off foray into the market.
"It's a lot of work to get a sukuk done. You need to have
some pricing advantage [for the effort to pay off]," added the
banker, who reckoned borrowers were likely to question whether
choosing the sukuk format to save 5bp-10bp in spread terms is
worth all the trouble.
"[As an issuer,] you would expect to save 15bp-20bp by doing
a sukuk," noted another banker. "But in this market, you should
be able to price a conventional close to a sukuk."
For some, the Republic of Turkey's debut 5.5-year sukuk,
slated to hit the market on Tuesday, will be a litmus test of
the potential that the Islamic format can offer in such a
bullish market. The deal will also shed some light on the
willingness of Islamic accounts, the biggest buyers of sukuk, to
leave the shores of the Arab Gulf and South-east Asia and buy
into names farther away from home.
EYES ON TURKEY
Turkey (Ba1/BB/BB+) is not the most atypical newcomer to
sukuk. Some of its Sharia-compliant participation banks have
issued Islamic bonds before, and bankers argued that issuing in
the Islamic format made perfect sense for the sovereign.
Historically, however, the country has preferred to focus on
conventional issues, in order to build a liquid benchmark curve.
"I very much doubt that they are doing this because it will
be cheaper [form of funding]," said the first banker, noting
that the sovereign is able to price conventional bonds at tight
A banker familiar with the deal said that Turkey aims "to
foster interest among a community of investors" who are
relatively new to it, while other suggest that this could be
just the first of a series of Sharia-compliant issues for the
Turkey's price guidance suggests that the premium it is
offering over its conventional curve is between 10bp and 20bp.
Revised guidance of 180-190bp over mid-swaps compares with a
level of 180bp over swaps for its April 2018 note just prior to
the sukuk's pricing announcement. The order book is already more
than USD5bn, with investors in Europe, the Middle East and Asia
still able to put in bids.
The mandate allows Turkey to raise up to USD1bn, although
the final size has yet to be decided. Citigroup, HSBC and
Liquidity House are the leads on the transaction, which is
expected to price on Tuesday and is structured as a ijara,
backed by real estate assets.
(Reporting By Davide Scigliuzzo; Editing by Sudip Roy)