APICORP, QIB sukuk issues show Gulf bond market power shift

Fund managers say there is still substantial latent demand for Gulf debt but investors would no longer accept tight pricings that prevailed just six months ago

Two issues of U.S. dollar Islamic bonds in the Gulf this week – the first in five months – suggested pricing power in the region’s bond market is shifting toward investors as banking sector liquidity dries up.

Saudi Arabia’s Arab Petroleum Investments Corp (APICORP) attracted an order book of only about $800m on Monday for a $500m sukuk issue that was tightly priced.

On Tuesday, Qatar Islamic Bank (QIB) drew a much more generous $1.75bn for a $750m sukuk sale, but at considerably wider pricing.

Fund managers and bankers said the contrast suggested there was still substantial latent demand for Gulf debt, a positive sign for other potential issuers – but that investors would no longer accept tight pricings that prevailed just six months ago.

“It’s all about pricing. APICORP was not seen as value at MS plus 100, but QIB at MS plus 135 makes more sense,” said Abdul Kadir Hussain, who oversees about $1.2bn in assets as chief executive at Dubai’s Mashreq Capital.

“I expect investors to be much more price sensitive going forward, given tighter liquidity conditions.”

Low oil prices, and Gulf governments’ plans to issue bonds to cover deficits caused by cheap oil, are forcing up interbank interest rates in the Gulf, changing local banks’ appetite for corporate bonds.

At the same time, foreign investors are approaching the Gulf with more caution because of the prospect that a multi-year period of cheap oil could slow economic growth and damage state finances.

APICORP, a quasi-sovereign issuer rated Aa3, established a $3bn sukuk programme in July. Earlier this year, it could have expected massive demand for its issue both because underlying demand for sukuk exceeded supply, and because U.S. dollar debt issues from Saudi Arabia are rare.

This week, however, the company only sold half the amount that bankers had expected it to sell. Its five-year sukuk were priced at 100 basis points over midswaps, which put off many investors.

As a result, about 80 per cent of the issue went to Middle East investors – a much higher concentration than usual. Banks took around 57 per cent and only 24 per cent went to insurers and provident funds, suggesting much of the issue may have gone to six lead managers.

The final pricing of the five-year sukuk from QIB, rated one notch below APICORP, was 135 bps over midswaps. That compared to 125 bps over midswaps for a five-year sukuk issue at the end of May by Dubai Islamic Bank, rated one notch below QIB.