saudi islamic finance: Landmark sukuk issue planned

Local property developer Dar al-Arkan Real Estate Development Company has agreed a $425 million sukuk issue with a five-strong group of banks, becoming the first Saudi company to issue international sharia-compliant paper. It is expected to open the door for other companies in the kingdom to tap the international capital markets.

The arranging banks and bookrunners are ABC Islamic Bank, Arab National Bank, Standard Bank, Unicorn Investment Bank (UIB) and West LB. UIB is acting as structuring agent and sharia adviser, and the form of the offering has been approved by the Bahrain-based bank's sharia board. It is backed by Dar al-Arkan's real estate assets, which include 20 residential developments across the kingdom.

The tenor is three years, with the notes paying 200 basis points over Libor. Roadshows kicked off in Dubai on 24 January and will travel to Bahrain and then London. The actual issuer will be a special-purpose vehicle based in the Cayman Islands, called DAAR International Sukuk Company. UIB and Standard Bank also worked together on an $18 million musharaka sukuk last July for Kingdom Instalment Company, the housing finance arm of Prince Alwaleed bin Talal's Kingdom Holding Company, which was again backed by real estate assets and issued by a Cayman Islands-based vehicle.

'This will be the first 'eurosukuk' out of Saudi Arabia, tapping the international financial markets of Europe, Asia and the Middle East,' says Jaafar Badwan, UIB's managing director for capital markets and treasury. The first corporate sukuk in the kingdom was a SR 3,000 million ($800 million) issue by Saudi Basic Industries Corporation (Sabic) last summer, arranged by HSBC (MEED 28:7:06).

'The Dar al-Arkan issue will open the door for Saudi private companies to access the international financial markets, which will in turn lower their cost of funds and contribute to corporate profits,' says Badwan. '[They] are moving from seeking local finance to accessing thousands of customers. For investors, the notes are attractive because the returns on GCC paper are so generous compared with those of European issuers with comparable credit risk.' Dar al-Arkan has an A- rating from Capital Intelligence.

An application has been made to the authorities to list the sukuk on the Dubai International Financial Exchange (DIFX), where it would join those of three UAE firms - Aabar Petroleum Investments Company, Nakheel and Ports, Customs & Free Zone Corporation - and Kuwait's Investment Dar, worth a total of $7,630 million. The exchange claims to account for 44 per cent of the world's listed sukuks, following the listing of Nakheel's $3,520 million instrument in mid-December.

Trading to date has been minimal, in line with the lack of investor activity on the DIFX in general. However, observers expect this to change over the course of this year as the volume of new issues increases. They are anticipating that both Islamic and conventional borrowers will want to tap into the Muslim market. 'Total global volume is now $14,000 million-15,000 million and I can see this rising to 25,000 million-30,000 million by the end of 2007,' says Badwan.