September 19, 2012 / 9:43 AM / 6 years ago

UPDATE 1-Turkey's debut sukuk attracts high Gulf demand

(Adds banker’s quote, background)

By Nevzat Devranoglu

ISTANBUL, Sept 19 (Reuters) - Middle Eastern investors snapped up most of Turkey’s $1.5 billion debut sukuk, the Treasury said, while Deputy Prime Minister Ali Babacan said the government hopes the deal will encourage other Turkish borrowers to sell Islamic bonds.

The 5-1/2 year bond attracted an order book of nearly five times the issue size, the Treasury said late on Tuesday, with Middle Eastern accounts taking 58 percent of the issue. European investors bought 13 percent and Asian accounts 12 percent, while 9 percent was sold in Turkey and 8 percent to U.S. investors.

The $1.5 billion sukuk was priced to yield 2.803 percent, roughly on a par with Turkey’s sovereign Eurobond due 2018 , which traded at around 2.76 percent on Tuesday.

Demand for sukuk from cash-rich Islamic investors has been largely unsatisfied this year, and strong Middle Eastern orders had been expected. Ernst & Young estimates global outstanding demand for sukuk totals about $300 billion, while new issuance this year may not be much over $100 billion.

“The Treasury is entering a new region with this,” said a senior banker in London, speaking on condition of anonymity.

“The results show that demand from Gulf investors was much higher than in London and Turkey. It didn’t look at the demand from this region with any political issues in mind,” he said, adding that the Treasury had not deliberately kept Turkish investment at a minimum.

“Also, the Turkish Treasury is making a point with the high (demand) it attracted to its debut sukuk issue.”

The relatively low share of the bond sold to local accounts reflected its aggressive pricing compared to other Turkish assets and alternative sukuk issues, said Kutlug Doganay, an equity analyst at Is Investment.

“Since there is no obligation for Turkish primary dealers to buy this sukuk and the spread was not attractive, it’s normal that demand was not high from Turkish banks,” Doganay said.

“If locals don’t have to buy Islam-compliant papers, they will choose to use liquid forex to invest in other higher-yielding assets. So we think Turkish demand mostly came from participation banks since they don’t have other papers to buy.”

Islamic banks are known in Turkey as participation banks, and sukuk are referred to as “participation certificates”.

Babacan, whose portfolio includes the economy, said the offering had a set a bar for future sukuk sales.

Prime Minister Tayyip Erdogan’s government, which espouses Islamic values, had shied away from a sovereign sukuk during its first decade in power, for fear of giving ammunition to critics who accuse it of seeking to roll back state secularism.

“We believe this is going to set a benchmark for the government and private sector,” Babacan said in an address to the Global Islamic Finance Forum on Wednesday. “For this issuance, we have prepared the (adequate) legal framework and tax regime.”

Turkey is expected to issue another, lira-denominated, sukuk, by the end of September, demand for which is also likely to be high, the Turkish unit of Bahraini lender Al Baraka said last week.

Writing by Ayla Jean Yackley; Editing by Catherine Evans

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