High demand for Saudi Arabia›s international sukuk, set to be the largest ever dollar Islamic bond, will reduce the new issue premium to barely a few basis points over Saudi Arabia›s existing conventional bonds, investors said. The dual-tranche sukuk, with maturities of five and 10 years, could total up to $10 billion, bankers previously said. A transaction of that scale could translate into a premium of 10 to 15 basis points over Saudi Arabia›s existing five- and 10-year paper issued in October last year.
But should the kingdom keep the issue size in check, the sukuk is likely to trade flat to Saudi›s existing curve, investors said.
Saudi Arabia representatives gave no indications of expected size and pricing during meetings in Abu Dhabi and Dubai on Sunday, the first day of the sukuk roadshow, investors who attended those meetings said.
The delegation included representatives from state oil firm Saudi Aramco, the central bank and ministry of finance, in what one Dubai-based fixed income portfolio manager described as a "very high calibre, high level" roadshow. The roadshow will end on Tuesday in London. Initial price thoughts could be released as early as then, with the issuance taking place the following day.
Should the new issuance size not exceed a threshold of approximately $6 billion, price guidance is expected to tighten to a premium of maximum five basis points above the existing curve, some investors said.
"The bonds should trade flat to the conventional as local investors will have high demand for the sukuk given the likely zero capital at risk weighting being applied to the sukuk for the domestic banks and the limited amount of available sukuk," said Max Wolman, senior investment manager for emerging market debt at Aberdeen Asset Management.
The kingdom›s conventional notes maturing in 2021 were quoted with a bid yield of roughly 2.85 percent on Monday, while the 2026 bonds were yielding about 3.6 percent, Thomson Reuters data showed.
Demand for the paper from Saudi banks is expected to be significant, also because the government has suspended monthly sales of domestic bonds for over six months, freeing up liquidity.
But demand from US accounts could be limited because of the complexity of the chosen sukuk structure and the "lack of duration", noted a Dubai-based fixed income portfolio manager.
"Also, Saudi in the secondary is very liquid, so if US investors want to get Saudi paper they can buy it there, and conventional."
US investors were heavy buyers of Saudi Arabia›s debut international bond last year.
Saudi Arabia plans to borrow between $10 billion and $15 billion internationally in 2017, a senior official said in December, as it tries to plug a budget deficit caused by lower oil prices.
Saudi Arabia has included a disclosure on credit risk retention requirements, part of the US Dodd-Frank Act, in the prospectus of a debut dollar sukuk which it is expected to issue this week and could total $10 billion.
The disclosure to comply with the act, which the US Congress introduced after the financial crisis to reduce risk-taking, has not been made for other sovereign sukuk issues.
The US retention rule was set to align the interests of issuers of asset backed securities (ABS) with those of ABS investors by asking the sponsor of an ABS securitization to have "skin in the game" by retaining 5 percent of the credit risk associated with the securities it is issuing.
In its sukuk prospectus, Saudi Arabia says that it does not consider its planned sukuk a securitization, but that the issuance "may be captured, as a technical matter, by the language of the US risk retention rules". Sukuk are generally considered to be asset-based, rather than asset-backed, but in order to comply with the rules, it will purchase at least 5 percent of the aggregate principal amount of each tranche it issues, the Saudi prospectus shows. — Reuters
