* Yield on Turkish sukuk will be low compared to Gulf issues
* Could be some 100 bps below Bahrain sukuk
* Sukuk supply/demand imbalance may offset new-issue premium
* But Gulf investors increasingly keen to diversify
* Strong demand would be positive signal for other EM issues
By Rachna Uppal and Mala Pancholia
DUBAI, Sept 13 Turkey's first-ever issue of a
sovereign sukuk will test Gulf investors' willingness to leave
their comfort zone within the region and settle for lower yields
outside it - potentially signalling fresh flows of Gulf money
into southeast Asian and African debt.
Turkey, rated BB by Standard & Poor's, held investor
meetings for the dollar-denominated Islamic bond in several Gulf
cities this week. The issue, which could raise up to $1 billion,
is expected during the week starting on Sept. 17.
Traditionally, Gulf investors have tended to focus on their
own region, where credit ratings tend to be high but
geopolitical risks keep yields higher than would normally be the
case for such ratings.
"Gulf investors tend to be comfortable with their regional
geopolitical risk, which maintains yields above assets of other
similarly rated EM (emerging markets) issuers," said Doug
Bitcon, head of fixed income funds and portfolios at Rasmala
Investment Bank in Dubai. "There is therefore less incentive to
look elsewhere when investing."
When Poland issued a $2 billion, 10-year conventional bond
this week, Middle Eastern investors showed little interest,
taking just 4 percent of the debt on offer.
But the Turkish sukuk is likely to attract much stronger
demand from the Gulf. One of its selling points will be the
sukuk format; unsatisfied demand for sukuk from cash-rich
Islamic investors in the Gulf has been massive this year. Ernst
& Young estimates global outstanding demand for sukuk totals
about $300 billion, while new issuance this year may not be much
over $100 billion.
Also, as Gulf investors grow in size and experience,
analysts detect an increasing desire among them to expand their
debt portfolios into other regions - even if that means
accepting somewhat lower returns.
"Gulf investors showed very strong interest in the recent
eurobonds issued by Turkish banks (over the last several weeks),
and this appetite should continue to the sovereign," said
Apostolos Bantis, fixed income analyst at Commerzbank in London.
Bitcon said: "Following events in recent years, there is
greater acceptance of the merits of portfolio diversification,
which can have an opportunity cost.
"There is a clear supply/demand imbalance in the sukuk
market and this new Turkey issue will therefore, in our view, be
on the radar of most Gulf investors."
If Gulf investors prove willing to buy the Turkish sukuk in
bulk, that will be an encouraging sign for their investment in
other emerging market issues - conventional as well as Islamic.
Among upcoming issues, Indonesia has mandated banks for a
sovereign sukuk issue that is expected by the end of this year,
while South African officials told Reuters in July they were
preparing to launch a sukuk, which would be the country's first.
In the immediate neighbourhood, Jordan said on Wednesday it
was discussing the issue of a seven- to 10-year eurobond of $750
million-$1.5 billion, while Morocco plans to sell a $1 billion
sovereign bond in October. Both countries receive official aid
and diplomatic support from the Gulf, which may be a plus for
investors from the region.
"A logical step for investors in the region who have so far
focused on GCC...opportunities would be to expand their scope to
North Africa, or Africa generally," said Chavan Bhogaita, head
of the markets strategy unit at National Bank of Abu Dhabi.
"As regional fixed income investors mature and develop, it's
a natural evolution for them to look at more deals in
potentially different geographies or different formats as a
means of avoiding concentration risk issues within their
Turkey has been a frequent issuer of conventional
dollar-denominated bonds so it has a well-developed yield curve.
For Gulf investors, increasingly comfortable with tenors beyond
the traditional five-year sweetspot, a seven- or 10-year
maturity could be most attractive.
Turkey's $1.5 billion, 7.5 percent bond maturing in 2019
was yielding 3.1 percent on Thursday. Its $2.5
billion 2022 maturity, issued at 6.25 percent earlier this year
, was yielding 3.75 percent on Thursday, about 5
basis points more than its yield on the day the sukuk mandate
Some bankers think the price advantage to Turkey of issuing
a sukuk, given the big supply-demand imbalance for Islamic debt,
may at least cancel out the new-issue premium demanded by
"I think it (Turkey's sukuk pricing) should be tighter than
the conventional," said one fixed income analyst.
Such calculations show the Turkey sukuk may deliver much
lower returns than comparable Gulf debt; the yield on a $750
million, seven-year sukuk issued in November by BBB-rated
Bahrain, three notches above Turkey, is now
around 4.03 percent.
NBAD's Bhogaita said Turkey would face a choice between
minimising its borrowing costs with the sukuk and attracting a
large number of Gulf investors, because it probably could not do
"Will they have to leave a little extra on the table to
appeal to broader Gulf investors, or is the aim to attract a
global, established investor community at the lowest cost of
Turkey is due to complete its roadshows on Sunday, through
HSBC, Citi and Kuwait's Liquidity House, a unit
of Kuwait Finance House. The sukuk would have an ijara
structure, backed by real estate assets.
(Editing by Andrew Torchia)