Saudi Arabia's first corporate bond market is unlikely to become a success without a sovereign bond and the removal of legal obstacles, even if Gulf issuances are slowly picking up. The launch of the Gulf's third bond trading platform after Bahrain and Nasdaq Dubai comes when troubles at several Saudi family-controlled firms are making headlines, underlining the problems of opacity of financial markets in the biggest Arab economy. Last month, the world's largest oil exporter launched a secondary trading platform for conventional and Islamic bonds, or Sukuk, the latest step to open up after allowing foreigners limited ownership on the Saudi bourse a year ago. Analysts welcomed the move as offering new funding to firms struggling to get loans, saying this would keep projects running as the kingdom launches a $400 billion stimulus package. But the absence of a sovereign bond as a price benchmark could act as a dampener: volumes have been lackluster with an average of less than two deals per day since the June 13 launch - only two trades since July 4 and nothing for five days, according to bourse data. Only five issues are listed on the platform, all coming from Saudi Basic Industries Corp (SABIC) and Saudi Electricity Co. “A sovereign issue would be welcome as a way of establishing a benchmark,” said Howard Handy, chief economist at Samba Financial Group in Riyadh. Sukuk sales could pick up, say, if Saudi Arabia followed the lead of Bahrain and Ras Al-Khaimah, a member of the United Arab Emirates, which sold Sukuk, and Qatar and Abu Dhabi which issued conventional bonds. But legal experts say that without an overhaul of the kingdom's archaic laws requiring lengthy approvals Saudi Arabia would continue to trail other Gulf states with Sukuk. Under rules of the Capital Market Authority (CMA), only Saudi stock companies that have operated for at least three years “under substantially the same management” can issue securities. “People are used to do the listing in Luxembourg or Dubai, where it's simpler and more efficient,” said Ikbal Daredia, head of capital markets and institutional banking at Bahrain-based Unicorn Investment Bank. Mohieddine Kronfol, managing director at Dubai asset manager Algebra Capital, agreed: “It (the bond market) doesn't address the issuance side, it doesn't address the legal infrastructure.” While the monarchy has vowed to overhaul legislation, experts do not see much progress as clerics overseeing the judiciary resist changes. “There are institutions that wield strength and influence ... that still perceive the bond and Sukuk market as non-compliant with Sharia,” said Abdulhamid Al-Amri, a member of the Saudi Economic Association. “As long as this issue is not solved, the market will not appeal to many investors,” said Amri. Apart from a long approval process and no common standard on the Shariah-compliance of sukuk investors also needed more information about issuers to assess a default risk, said Abdulaziz al-Bosaily, a partner at law firm Clyde & Co. “If it is a non-listed company there is limited information avaliable,” the Riyadh-based lawyer said. The market launch comes against the backdrop of troubled family firms Saad Group and Ahmad Hamad Algosaibi and Bros (AHAB) who have refused to detail the size of debt problems restructuring and which now battle in court in New York. Handy said a recent clampdown on insider trading by slapping fines even on big names showed the CMA meant business but more was needed to make corporate governance compulsory. “It is still easy for firms to avoid revealing the size of their debts or levels of cash flow,” he said. Gulf bond markets are in an early stage of their development and lack the depth of Western bond markets. In particular the secondary market has been very thin with most bond and Sukuk issues being held until maturity by investors. But despite all obstacles, the market holds considerable promise. “Local banks - the main source of financing for Saudi corporates - are reluctant to lend and low valuations have subdued IPOs, so Sukuk potentially provides an important source of financing,” said Paul Gamble, head of research at Riyadh-based investment bank Jadwa Investment. “The collapse in the stock market last year and the very limited investment channels open to investors in the Kingdom has encouraged investor interest in more predictable assets such as Sukuk,” he said. Samba's Handy said the market would also get a lift from a planned mortgage law, which is expected by the end of the year, for which the government wants to set up a firm buying up mortgages and securitizing loans into tradable Sukuk. Apart from Saudi Electricity raising SR7 billion ($1.8 billion), Dar Al-Arkan, the biggest real estate firm, sold Sukuk worth SR750 million in the Kingdom this year.
