Sukuk expected to form large part of Saudi project funding

21 May 2014

Need for capital is rising faster than Saudi banks’ lending power

A large proportion of Saudi project funding is likely to come from the sukuk market in the near future, Yasir al-Rumayyan, CEO at Saudi Fransi Capital, tells MEED.

“We haven’t seen a lot of capital increases in local banks, so there isn’t a huge jump in lending power. The only logical solution is for companies to issue sukuk,” says Al-Rumayyan.

Based on the backlog of infrastructure-related companies, he expects continued growth in the sukuk market for the next four to five years as Saudi government expenditure drives capital markets growth.

“If you look at the debt capital markets spreads, pricing is very low – even second tier issues are around 150 basispoints over Sibor,” he says. “The sukuk market is developing on all fronts, with the number of issuers increasing and [dairy food company] Almarai completing the country’s first perpetual issuance last year.”

With the exception of banks that may need foreign currency, he says issuers are likely to continue issuing in riyals amid solid demand from local investors as secondary market activity is low, indicating that there is not enough issuance in the market.

Al-Rumayyan adds that 2014 also promises to become a record year for initial public offerings. While equity capital markets transactions totalled more than SR12bn ($3.2bn) in 2012, the figure dropped to less than SR2bn in 2013. But 2014 promises to be more in line with 2012 as market conditions have picked up.

“What will help is that the regulator has indicated to be more hands off when it comes to the valuation of companies, which will allow market forces to determine the price range,” he says.

Saudi Fransi Capital is currently working on an offering in the hotels and amusement industry meant to raise at least SR800m. It is also advising on Acwa Power’s flotation, which is planned to open by the end of the year, and Dr Suleiman Alhabib Medical Group, which may launch this or early next year.

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