Success of IDB issue reflects interest in sukuk

Sep 14, 2009 (Arab News - McClatchy-Tribune Information Services via COMTEX) -- PIBSF | Quote | Chart | News | PowerRating -- The Jeddah-based Islamic Development Bank, the multilateral development bank (MDB) of 57 Muslim countries, has finally launched its latest capital markets offering, a $850 million fixed-rate sukuk under its $1.5 billion MTN issuance program. Not surprisingly, the issuance was 2.4 times oversubscribed with 90 orders in the order book run by the mandated lead arrangers HSBC, Deutsche Bank, BNP Paribas and the two co-lead arrangers, CIMB of Malaysia and Bank Islam Brunei Darussalam.

The market has been awaiting this IDB offering since July 2009, but on the advice of its three lead arrangers, the IDB decided to delay the marketing of the sukuk to September, even though the legal documentation and the ratings for the sukuk have been in place since the end of July. This was because of Ramadan, the Muslim month of fasting, and the fact that many senior bankers and investors, especially in the Middle East region, are traditionally on holiday during August.

Moody's Investors Service, the international credit rating agency, on Aug. 26 confirmed the assigning of an Aaa rating, with a stable outlook, to the IDB's proposed sukuk MTN program, which is similar to the long-term foreign currency rating assigned to the IDB's Ordinary Capital Resources.

The IDB was also waiting for the right market conditions to get the best possible pricing for the Aaa/AAA rated issuance. The 5-year sukuk as such was eventually priced at par with a 3.172 percent semi-annual profit rate and a yield of 40 basis points (bps) over 5-year mid-swaps and 77 bps over 5-year benchmark US Treasuries respectively.

As previously predicted, book building began on Sept. 8, with the official price guidance set at a spread of 40 bps-43 bps at the start of business on the next day in London. While the book continued to grow, finally reaching close to $2 billion, the IDB decided to close the transaction at a volume of $850 million at the tight end of the pricing guidance. The IDB in this process undertook a comprehensive program of international road shows in the Gulf, Kuala Lumpur, London, Hong Kong and Singapore.

The demand for this latest IDB offering should be seen in contrast to the demand for the recent $1.5-billion Petronas Sukuk Al-Ijara, which was five times oversubscribed. This perhaps is another indicator that sukuk originations out of Asia may be currently more preferable to investors, especially from East Asia, with the Chinese and Hong Kong-based investors in particular, taking a greater interest in Islamic capital market offerings as a diversification of investment portfolio strategy in the wake of the global financial crisis.

However, the IDB stressed that its latest sukuk offering achieved a high quality order book with the vast majority allocated to real money accounts. Dr. Abdul Aziz Al-Hinai, IDB vice president who led the road shows, praised all those involved in the transaction for the successful outcome of the issuance. "This is the largest amount ever raised by the IDB and has established a competitively priced liquid benchmark sukuk, in addition to the targeted investor diversification," he explained.

The geographic distribution for the subscription to the IDB sukuk is also revealing. Over 60 percent of the paper, according to the IDB, was placed outside the GCC region. In terms of the geographic split, Asian investors accounted for 37 percent, European investors 24 percent, GCC region 37 percent and others 2 percent.

The strong Asian contingent reflects the status of the IDB as an established MDB with an AAA rating and a zero risk weighting for an MDB by the Bank of International Settlements in Basle. Similarly the IDB is rightly perceived not as a multilateral quasi-sovereign issuer as opposed to a GCC institution. The Asian uptake would almost certainly have been less given today's market conditions, especially the defaults of key sukuk issuers in the GCC, including Kuwait and Saudi Arabia.

The proceeds of the IDB sukuk will be used to help member countries mitigate the impact of the global financial downturn and the rise in commodity prices and for the expansion of financing IDB projects in member countries.

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