'More Saudi firms to tap short term sukuk' - HSBC

The successful sale on Saturday of a nine month corporate Islamic bond will encourage similar issues in Saudi Arabia where access to longer term financing is tight, HSBC said on Monday.

HSBC's Saudi affiliate advised and managed the $187 million sukuk by private construction company Saudi Binladin Group (SBG) - the kingdom's first sukuk issue with a maturity of less than three years.

SBG's sukuk was issued on a zero coupon basis and was oversubscribed 2.5 times, HSBC said. The proposed return was based on a discount to the price at maturity.

The size of the discount was not revealed but Asad Saeed Khan, a senior fixed income and multi assets portfolio manager at SAIB-BNP Paribas Asset Management Co, which bought into the issue, said it was 3 percent.

Speaking to Reuters, he said: "It's attractive given its 9 month maturity and in view of the relative opportunities available in financial markets."

Interest for such issues is palpable from both issuers and investors, HSBC Saudi's Head of Global Capital Financing Sunil George, and Muhammad Farhan, Head of Islamic Finance, said in written responses to Reuters questions.

They said: "We expect to see more short terms sukuk issuances. The available short term liquidity is significant and the investor demand for short tenor, credit worthy investments has been clearly demonstrated."

They added: "SBG's short term sukuk, though the first of its kind in the market, is expected to be of path breaking nature".

After years of rapid credit growth, most Saudi banks saw their profitability hit over the past four quarters by both hefty provisions to counter exposure to troubled Saudi firms and a slowdown in lending.

In 2009, provisions by Saudi banks for non performing loans doubled to about $2.93 billion as a rising number of Saudi and regional firms ran into financial problems.

The HSBC executives said prospective issuers want to diversify on capital markets to raise financing for certain needs and save bank lending for uncertain requirements. They declined to say how many short term sukuk mandates they are currently working on.

Saturday's sale was SBG's second sukuk issue since 2008, when it raised $266.6 million via a 5 year instrument, also under a private placement managed by HSBC.

Family owned SBG has been awarded billions of riyals worth of government contracts to build roads, education and healthcare facilities as part of a $400 billion government spending plan that covers the five years to end 2013.

The HSBC executives said: "SBG proceeded with this issue in order to diversify the sources of their financing away from banks and strike a balance between banks and capital market financing. There is a time gap between when they can bill for some contracts and the time when they actually get the money."

They added: "SBG's (sukuk) nine month maturity serves to meet part of their working capital requirements." (Reuters)