The international sukuk market is on a roll. Volumes are up 60% on the same time last year, to $6.6bn. And the landmarks have come thick and fast. This weeks deal from Saudi Electricity Company (SEC) included the markets first ever 30 year tranche.
SEC will take the plaudits for this breakthrough, particularly since only a week ago some observers had sniped that a conventional deal would be the only way for the company to push out beyond 10 years. SECs ability to grab $1bn in a 30 year dollar sukuk tranche should prompt a rethink of the scale of international demand for longer dated Shariah compliant paper a definite cause for optimism given the financial crisiss lessons about short term funding of long term assets.
But one should not get too carried away. To generalise from SECs example would be to overlook those features that make the company and its story stand apart. Not all issuers require dollar funding, for a start, but SECs success also rests on the fact that it has suitable long term Shariah compliant assets and an appeal that stretches way beyond the confines of the traditional Islamic investor base.
The stats are not yet out, but there is little doubt that conventional investors have made up a big component of SECs 30 year allocation. These will have been pension funds that are looking to match their long term liabilities with suitable assets. Some Islamic investors may be punting on the longer dated issue on the back of grey market trading or as a duration play. Some investors pointed to a small pick-up to the existing curve and the liquidity benefit of investing in the on-the-run issues.
But it is surely no coincidence that SECs roadshows this time concentrated solely on the US and Europe. Regardless of having good, suitable, Shariah compliant assets and a strong business model, a longer dated sukuk borrower also needs to be highly visible to and trusted by these international investors.
That takes time. SEC may be the best proxy for a Saudi sovereign benchmark, but this was no overnight success. The companys $1.75bn debut international sukuk issuance last year capped almost five years of preparatory work, which began in 2007 when it obtained ratings close to the sovereign from the three main rating agencies. This opened the door for SEC to tap different funding sources and establish a profile in domestic markets through loans, sukuk and credit export agencies.
Thereafter it began to take transactions offshore to gauge appetite in the wider Middle East, Europe and Asia leading eventually to its five and 10 year dual tranche breakthrough last March.
SEC said at the time of that deal that its objective for the future was to reach a deeper investor base and go to 15 years or longer. The companys CFO reasoned that other international utilities had achieved 20 or 30 years finance, making it a natural goal for SEC.
Other sukuk borrowers would be wise to take note and make this their goal too. But they need to be under no illusions about what this involves even with the momentum that a barnstorming deal from a name like SEC can provide. A lot of hard effort and strategic planning will be needed before there are any prospects of more names joining SECs privileged position up the curve.