Project Islamic bonds are expected to pick up steam in Saudi
Arabia with the launch of the first project sukuk this month as issuers seek to
diversify sources of funding following global financial woes that may dry up lending
from international banks.
Saudi Arabia, with projects underway worth $623bn according
to the economic weekly MEED, is the largest Gulf markets and is expected to
require billions of dollars in financing. Financing has traditionally come from
government funds and syndicated loans from local and international banks.
But the launch of the kingdom's first project sukuk instrument
earlier this month - a $1bn Islamic bond to be issued by Saudi Aramco Total
Refining and Petrochemical Co - is expected to provide a financing alternative
and open the doors for more issuance to come.
"The sukuk issuance does potentially change the game
quite significantly," said Jarmo Kotilaine, chief economist at National
Commercial Bank in Riyadh.
"Most issuers aren't innovators, they are replicators.
But there are now advisors out there that are in the position to offer similar
solutions. It will generate interest."
That interest comes at a good time as international banks
struggle with mounting global economic fears as well as their own balance-sheet
woes, making lending less attractive.
"Although it is very likely that a core group of banks
will continue to lend to projects in the region, aggregate debt capacity will
be eroded and the price of liquidity will likely become more expensive,"
said Andrew Davison, senior vice president and team leader of EMEA project
financing at Moodys.
That creates opportunity for the sukuk market to become an
increasingly important potential source of funds, he added.
But issuing project sukuk has been a piecemeal proposition
so far. Issuers, such as Saudi International Petrochemical Co (Sipchem), have
used sukuk proceeds to partially finance infrastructure projects.
While the offering was oversubscribed, indicating demand, a
pure-play project bond had yet to be offered.
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SATORP's instrument - a musharaka agreement in which holders
become the owners of the project or the assets of the activity - will be used
to finance its planned 400,000 barrels per day crude oil refinery in Jubail.
Initial price guidance for the sukuk is seen at 6-month
Saudi interbank offered rate (SAIBOR) plus 95-105 basis points.
Final pricing is expected on Sept 28 and could provide an
idea of the demand for such a project, fueling further offerings, said Nabil
Issa, partner at King & Spalding in Dubai.
"It's about letting someone else do the homework first,
overcome the regulatory hurdles and invest the time and money to prove it can
be successful," he said. "I think you'll see a lot more projects
being financed by sukuk and becoming more popular after this."
But structuring a sukuk does come with challenges that have
prompted potential issuers to seek other forms of financing such as
conventional loans or a commodity murabaha, a cost-plus-profit transaction.
Sukuk can be time-consuming and more costly, involving the
creation of a special purpose vehicle which uses the sukuk proceeds to pay a
contractor to build a future project. And there's no standardised documentation
for a sukuk structure.
But there is more willingness now to gain familiarity with
sukuk as an alternative.
"Corporates are getting more educated about the process
and are beginning to appreciate the benefits of diversifying their sources of
financing," said Faisal Rehman, co-head of corporate and investment
banking for Saudi Arabia at Deutsche Securities.
"The regulatory process is becoming a well-trodden path,
investors are getting more familiar with debt capital market instruments, it's
just a phase of development that Saudi Arabia has firmly embarked on."
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