Greece, US rates overshadow hybrid sukuk issue in Dubai

The Greek debt crisis and concern about US monetary tightening are complicating a perpetual sukuk sale by Dubai construction firm Drake & Scull, suggesting the Gulf's hybrid debt market may be too fragile to serve as a major funding source for companies.

DSI set initial price guidance last Wednesday at around 9 per cent for a perpetual Islamic bond sized at $150-200 million and which was expected to price on Monday, but by Tuesday afternoon the bond had not been launched.

One banker with knowledge of the deal, speaking on condition of anonymity because the deal was still active, said the company might have to compromise on size and price.

"DSI is now talking to relationship banks to see if it can raise the balance it requires, over and above the commitment from lead arrangers," he added.

The company did not respond to emails seeking comment, while bankers at joint global coordinators Emirates NBD Capital and HSBC declined to comment. In addition to those two banks, Al Hilal Bank and Standard Chartered are joint lead managers.

No Gulf issuer has sold a perpetual bond internationally since UAE schools operator GEMS Education priced a $200 million five-year sukuk in October 2013.

Bankers believe several other companies are planning perpetual issues. Oman's Renaissance Services said on Sunday it planned to issue perpetual notes to finance a buy-back of convertible bonds.

But the delay to DSI's issue suggest the pipeline may dry up. Gulf investors are traditionally wary of complex bond structures, especially at times of global market instability.

"We've seen through various deals that the regional fixed income investors aren't particularly comfortable with the non-vanilla structures, and hence their demand for such notes has tended to be somewhat subdued," said Chavan Bhogaita, a managing director at National Bank of Abu Dhabi. "Over time we would expect this to change, but let's not forget that this market is still fairly young."

Perpetual bonds by Gulf issuers are still performing well in the secondary market, with Dubai retailer Majid Al Futtaim's 7.125 per cent bond sold in October 2013 bid at 4.525 per cent, 17 basis points off a lifetime low hit last October.

DSI's sukuk may be structured more attractively for investors, as the yield on Majid Al Futtaim's issue, rated BB+ by Standard & Poor's and Fitch, is to step up only 25 bps and 75 bps in two stages.

DSI does not have a credit rating so it was freer to set higher yield step-ups, reassuring investors that it has a strong incentive to redeem the sukuk early. If the company does not decide to call the bond after five years, the yield will step up a massive 500 bps.

A London banker said the timing of DSI's issue was unfortunate, however, not just because of the global environment. Many Gulf retail and private banking investors have become less active with the approach of the holy month of Ramadan, he said.

 

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