QIB successfully closes its debut $750m sukuk
Published: Oct 10, 2010 23:11 Updated: Oct 10, 2010 23:11
It is a step in the right direction, but in terms of adding critical mass to the pool of issuances of international sukuk, it is a mere drop in the ocean. Nevertheless, the successful closure in early October 2010 by Qatar Islamic Bank (QIB), the largest Islamic bank in Qatar, of its debut $750 million fixed-rate Wakala sukuk underlines the fact that despite the huge latent appetite for “A” rated Islamic commercial paper from investors all over the world, such issuances are too few and far between to stimulate an effective global sukuk market and its attendant secondary trading.
Yes, the originators will heap on the plaudits of the importance and impact of the issuances - from a domestic, regional and global market perspective - but in reality once the dust settles, the attention easily moves on to the next such origination offered on the international financial markets.
Despite the fact that QIB stresses that this issue could pave the way for future issuances, it settled for a single transaction as opposed to a program of which this $750 million sukuk issued on its behalf through a special purpose vehicle (SPV), QIB Sukuk Funding Limited, would have represented the first tranche.
While sovereign Qatar has issued a sole $700 million Sukuk Al-Ijarah in 2003, of which part of the proceeds went to finance the construction of the athletes' village for the Asian Games in 2006, corporate issuances have lagged in the emirate compared with markets such as Saudi Arabia, the UAE, Bahrain and Malaysia, which have a very active sukuk origination market. The Qatar Central Bank also has an active conventional bond program. This leaves Malaysia and Bahrain as the two most dedicated and supportive issuers of both domestic and international sukuk in the world. With due respect to both Kuala Lumpur and Manama, this is hardly the stuff a functioning and sustainable global sukuk market can be based on.
The QIB issuance, which was jointly lead arranged by QInvest, HSBC and Credit Suisse, is the first international issuance by QIB and the first sukuk by a Qatari financial institution. The three institutions are also the bookrunners, while the Islamic Development Bank and National Bank of Abu Dhabi were the co-managers.
Global sukuk issuance have been meager in 2010 with sovereign Malaysia with its $1.25 billion Malaysia Global Trust Certificates and the $450 million Sukuk Al-Ijara issued by Dar Al-Arkan Real Estate Development Company (DAAR) being the notable exceptions. Saudi Electricity Company (SEC) is also finalizing its debut international issuance, having received the go-ahead from the Capital Markets Authority in June 2010.
Following a series of road shows in key markets in Asia, the Middle East and Europe, QIB went ahead with the offering. The demand was very robust with the order book closing at $6 billion, which means the issuance was oversubscribed nearly 8 times. This, says QIB, is the largest order book for a GCC financial institution for a 5-year offering. The “A” rating assigned by the international rating agency, Fitch Ratings Services, also boosted appetite for the issuance.
The huge appetite for the issuance is reflected in the tight pricing. The transaction was able to price at a final spread of MS+237.5 basis points (bps), 25 bps through initial price whispers, and at the tight end of guidance. While QIB was targeting to price the deal on par with Central Bank of Qatar (CBQ) bonds, the strength of the order book allowed the bank to price its 2015 sukuk around 10 bps tighter than CBQ's 2014 bond. Not surprisingly, the sukuk has a profit rate of 3.856 percent per annum which will be paid through a fixed coupon. This fixed rate coupon, says QIB, is the lowest ever hard currency coupon from a MENA financial institution to date.
The sukuk which has a tenor of 5 years matures on Oct. 7, 2015, and is listed on the London Stock Exchange and governed by English law, by far the leading legal jurisdiction for international sukuk issuances, although QIB stresses that the sukuk assets are governed by Qatari law.
An elated Sheikh Jassim Bin Hamad Bin Jassem Al-Thani, chairman of QIB, could not be more to the point: "Qatar Islamic Bank priced its highly successful debut international sukuk on Sept. 30 representing the first international sukuk transaction from a Qatari financial institution. We are very pleased at the excellent market reception to Qatar Islamic Bank's pioneering sukuk issue. The highly successful offering demonstrates the confidence which international investors place in the State of Qatar and its Islamic banking market and confirms the access to funding which our financial institutions and corporates enjoy from the Islamic capital markets. Investors' strong interest resulted in the order book reaching to $6 billion, around 8 times of the offer amount. This is a highly successful result that further confirms the credibility of QIB and the investors' confidence in the promising outlook for QIB."
According to QIB, this debut issuance will be the platform for future forays into the Islamic capital markets especially through more sukuk issuance, and will further strengthen QIB's balance sheet and its ability to meet its commitment to national economic development.
In terms of the geographic distribution, Middle East investors subscribed half of the issuance, followed by UK and Asia investors with 16 percent each, US offshore investors with 7 percent uptake, European investors with 6 per cent uptake and the others with 5 per cent uptake of the subscription. Banks were the biggest subscriber to the issuance with an uptake of 40 percent, followed by fund managers with 33 percent, sovereign wealth funds and international agencies with 17 percent and private banks with 10.0 percent.
QIB, in fact, itself subscribed QR1.25 billion in a recent domestic Sukuk Al-Ijara issued by the Qatar Central Bank on behalf of the government of Qatar. The 8-year sukuk matures in June 2018. The security and returns of the sukuk investment are enhanced by the Qatari government's guarantee to repurchase the shares from investors at maturity. According to Salah Jaidah, QIB CEO, the issuance of the Sukuk Al-Ijara in domestic currency "aims to diversify the financial industry, consolidating local sukuk and supports the dynamic participation of Islamic financial institutions in funding the governmental sector. The investment initiative aims to also attract excess liquidity within the financial industry, and offers well established local banks the opportunity to invest in a high-return investment mechanism."
QIB recently reported encouraging interim results for 2010 with net profit increasing to a record 601 million Qatari riyals and net financing income reaching QR906 million compared with QR845 million for the same period in 2009. Similarly, total equity reached QR8.4 billion in the first half of 2010, an increase of 12 percent compared to same period in 2009, and total assets topped QR45.2 billion, a growth of 27 percent on the same period in 2009.
While banks in the West are reluctant to increase financing especially of small businesses, QIB is financing portfolio, which is 95 percent domestic, increased from QR19.7 billion in first half of 2009 to QR28.6 billion for the same period this year. This included a QR2 billion Murabaha financing facility for the local Barwa Real Estate. Similarly, customer deposits grew by 26 percent from QR20.2 billion to QR25.4 billion for the same period respectively. This says QIB reflects customers' increasing confidence in the bank's performance.
Not that QIB was not affected by the impact of the global financial crisis. However the impact was more on the real economy which affected the bank's customers. Jaidah is confident of the bank's successful strategy in dealing with provisioning of bad loans and reducing the non-performing loans' ratio to 1.4 percent. During the first half of 2010 QIB also consolidated its domestic activities and plans to increase its branch network in Qatar from 26 to 35 by 2012.
Abroad, QIB signed a MoU with the leading French banking group Banque Populaire Des Caisses d'Epargne (BPCE) to promote cooperation between the two banks for launching Shariah-compliant products to the French SME and retail banking sectors. The two banks will also cooperate on the possibility of arranging sukuk origination out of France for French corporate and other issuers.