Gulf conventional bond issuance more than doubles to $11.1bn - sukuk not the only game in town

The issuance of conventional bonds in the Gulf has increased more than tenfold in the last three years from just $964m in 2003/04.

The phenomenal growth in the use of conventional bonds in the Gulf has largely been overshadowed by the rise of Islamic bonds which has nearly trebled in the same period (to year end June 30 2007) to reach $14.5bn up from $5.1bn in the previous year.

Sukuk issuance was 57% of all corporate bond issuance in the Gulf over the last year although that is below the 80/20 share that it was running at in the summer of 2006.

Explains Adrian Creed, Partner of Trowers & Hamlins: 'Gulf corporates are not solely committed to sukuk. They will use conventional bonds or rights issues when they see fit. For example, a recent fundraising by DP World saw them issue a $1.5bn 10 year sukuk and a US $1.75bn 30 year conventional bond.'

'Pragmatism overrides the kudos of issuing a sukuk. But it is clear that bonds are now a well established tool in the GCC.'

Trowers & Hamlins says that the continued shift towards corporate financing through longer term bonds and sukuk and away from just bank loans and short term paper is a healthy indicator for an emerging market.

According to Trowers & Hamlins the average tenor (time to maturity) of sukuk issued over the last year was six years, up from an average of 4.8 years in the previous twelve months issuance.

Comments Adrian Creed: 'You just need to look at the fate of Northern Rock to see that an excessive reliance on short term paper is not a healthy diet.'

'Longer term debt is obviously more expensive but it is an essential part of a sensible corporate financing strategy.'

'The subprime meltdown has left many short term borrowers in the UK and US high and dry. I think Gulf corporates will heed that lesson.'

Adrian Creed says that the sukuk market is now getting back on track as sentiment recovers after the subprime meltdown of the summer. Dana Gas, of the UAE, completed a $875m sukuk in early October. UAE based RAK Properties has just announced that it intends to sell $2bn of sukuks early next year and Kuwaiti real estate firm Abyaar has announced a $700m sukuk sale also for early 2008.

Adds Adrian Creed: 'The fundamental drivers behind the growth of sukuk that really set this market off in 2004 are still firmly in place. Excess wealth is being created by the oil boom and ever higher proportions of that money are being fed into shariah compliant investments.'

'As the market reopens foreign sukuk purchasers may be initially wary of the less well known sukuk issuers.'

'Gulf based corporates want international institutions buying their sukuks as it is part of their process for internationalising their companies. However, they don't necessarily need international investor demand to keep their financing programmes going.'