Saudi Dairy Firm Almarai Eyes Hybrid Sukuk

Saudi Arabian dairy producer Almarai Co has chosen four banks to arrange the sale of a hybrid Islamic bond, or sukuk, banking sources said on Wednesday, in what would be a first for the Kingdom’s debt market.

The Gulf’s largest dairy firm has mandated the investment banking arm of Banque Saudi Fransi, BNP Paribas, HSBC’s Saudi Arabian unit and Standard Chartered to arrange the transaction, two bankers said.

The offering, which is not imminent, is likely to be denominated in Saudi riyals, although the company could opt to issue in dollars instead, four bankers said, speaking on condition of anonymity as the information is private.

A spokesman for Almarai was not reachable for comment.

“Both dollars and local currency are on the table,” said a Saudi-based banker who pitched for the deal but whose institution was not selected.

Hybrid structures are rare in the Gulf region, although two banks in the United Arab Emirates have tested markets with hybrid sukuk since last year. Majid Al Futtaim, a UAE conglomerate, met investors in May ahead of a possible corporate hybrid bond but unfavourable market conditions stalled the sale.

Hybrids are usually accounted for as subordinated debt on a firm’s balance sheet, and contain some equity characteristics.

Almarai’s CFO, Paul Louis Gay, told reporters in May it could opt to issue a hybrid Islamic bond in the next 12 months to help fund its ambitious growth plans, with a target amount of around $500 million.

Almarai announced in May 2012 it was targeting SAR15.7 billion ($4.2 billion) of capital spending over five years to fund its expansion.

This followed the acquisition in December 2011 of Argentine farm operator Fondomonte to secure supplies of animal feed.

However, Gay said in May it was looking to raise the cash from international investors, rather than the local debt market.

There are positive and negatives with both currency options, the Saudi-based banker said.

The local debt market is extremely liquid and Almarai could achieve better pricing because of the guaranteed high demand. Although, international investors would be more comfortable with the hybrid structure, given that such deals have been sold by corporates in other parts of the world.

Traditionally, Saudi companies have relied on bank loans and retained earnings to finance their expansion. But many are now diversifying their financing requirements into the bond market.

Almarai was last in the market in March with a SAR1.3 billion Islamic bond – its second local currency sukuk.

Earlier this month, Almarai posted a 4.9 per cent year-on-year rise in second-quarter net profit on the back of growth in its core business. The SAR398.2 million figure narrowly missed the average forecast of nine analysts.

Its shares have gained 16.9 per cent year-to-date and are trading at their highest level since February 2006. The stock offers a diversification play away from the Kingdom’s dominant banking and real estate sectors.