Low interest rates and Dubai World's restructuring accord seen as key factors spurring demand
Saudi firms may launch 10 Islamic bonds, or sukuk, in 2011, more than double their number this year, but they will be dominated by private placements, a specialist at Saudi Hollandi Bank said on Monday.
"The market confidence is coming back ... We should probably see two or three (sukuk issues) every quarter over the next year ... Ten more issues coming in 2011," Haroon Nisar, senior manager for Islamic banking at the Royal Bank of Scotland affiliate told the Reuters Middle East Summit in Riyadh.
Key factors that will spur demand for Saudi sukuk issues will be a low interest rate environment in Saudi and Dubai World's restructuring accord with 99 percent of its bank lenders as well as Dubai's successful $1.25 billion conventional bond issue in late September.
Nisar said: "Previously, people were holding most of their investments in cash and generally now they feel they have to go back in business because of really low interest rates, it's very difficult to keep cash."
He added: "There is a lot of money around looking for good assets ... The renewed interest from the issuers' aspect is there."
Saudi Arabia has had four sukuk issues this year so far, Nisar said, but declined to comment on the expected size of issues and only cited Jeddah based Islamic Development Bank (IDB) and an Aramco-Total joint venture as being among the prospective issuers.
Nisar said, however, that the majority of the other eight issues will have short term maturities amid a preference for private placements.
He said: "Private placements is relatively easy to do, there is less disclosure for companies."
The interest rate environment in Saudi Arabia - the main repo interest rate stands at 2 percent - might seem discouraging for prospective sukuk buyers.
Nisar said: "But investors do not have any option ... That's why the best option is coming with shorter term instruments where you don't have to lock yourself in for three years or five years, so coming in with the commercial paper segment in the sukuk market.
He added: "That is the best way for this (sukuk) market to grow."
As an example he cited the sale in July of a nine-month corporate Islamic bond by contracting firm Saudi Binladin Group. (Reuters)