April 5, 2017 / 7:54 AM / 4 months ago

UPDATE 1-Saudi Arabia picks hybrid structure for debut dollar sukuk - prospectus

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By Davide Barbuscia

DUBAI, April 5 (Reuters) - Saudi Arabia has chosen a hybrid structure for its debut international sukuk, the prospectus for the offer showed, a format widely used in the Saudi local debt market, but not the most popular for sovereign issues.

The Islamic bond, expected to go up to $10 billion, will be the country's second international debt sale after a $17.5 billion conventional bond in October last year. That bond issue, the largest ever sold across emerging markets, was part of an effort to diversify Saudi Arabia's funding sources to plug a budget deficit caused by lower oil prices.

Saudi Arabia will start meeting fixed income investors for the sukuk, a dual-tranche Islamic bond with five- and 10-year maturities, early next week.

An amount equal to 51 percent of the bond proceeds will be used in a mudaraba agreement, a form of Islamic investment management partnership. The remaining 49 percent of the proceeds will be used under a murabaha facility by the trustee, a Cayman Islands-incorporated company called KSA Sukuk Limited, to purchase sharia-compliant commodities, the prospectus said.

Such a hybrid structure, which replicates the riyal-denominated sukuk offer launched by oil giant Saudi Aramco earlier this month, is common in the Saudi local currency debt market. A different lease-based (ijara) sukuk structure has been the most commonly used by countries raising money via international debt issuances.

A hybrid structure might be too complex for some international investors to the point of possibly testing their appetite for the deal, bankers told Reuters last week.

Citigroup, HSBC and JP Morgan are the global coordinators mandated to arrange investor meetings ahead of the sukuk offering. They are joined by BNP Paribas, Deutsche Bank and NCB Capital as lead managers and bookrunners. (Editing by Saeed Azhar and Jane Merriman)

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