Sukuk market shows growing depth
Aldar Investment Properties and Nogaholding went head-to-head with 10-year sukuk transactions on Wednesday but both were comfortably oversubscribed, highlighting the growing depth of the Islamic bond market.
The two issuers, one a partially government-owned real estate manager in Abu Dhabi, the other a Bahraini state-owned oil and gas company, became the second and third GCC issuers of 10-year sukuk notes last week, following Saudi Arabia's inclusion of the tenor in a US$6bn dual-tranche deal on Monday. That offering also had a six-year sukuk tranche.
Historically, the US dollar sukuk market had revolved around five and seven-year tenors, but a syndicate banker said that regional investors are now comfortable "taking off-the-run tenors up to 10 years".
And for issuers, it makes sense to go out as long as possible given the Treasury market is flat between five and 10 years. Indeed, Noga had considered a seven-year tenor but eventually decided to go for the longer notes.
Aldar Investment Properties moved first with its sukuk offering, which was also its debut in green format, announcing IPTs of 185bp area over Treasuries.
AIP, rated Baa1 by Moody's, is the largest real estate management company in Abu Dhabi in terms of assets under management and a majority-owned subsidiary of Aldar Properties. Aldar is 50% owned by the government of Abu Dhabi through two state-owned holding companies. While the term real estate can send a shudder through some people, especially in connection with the UAE, one banker close to the deal said AIP is as good a credit in the sector as there is.
Lots to like
"The Abu Dhabi real estate story is different to Dubai, it's more stable and Aldar is the biggest name there. It's very high grade, it has partial government ownership, it has a diverse platform – it's not just all malls or commercial property or residential property. And then you offer a green sukuk and it's even better. There's a lot to like here," said the banker.
AIP is actually higher rated than Aldar Properties, which is rated Baa2 by Moody's. Its revenues are based on leasing out contracts for assets it owns and controls. "AIP actually gets you closer to the cashflows. The cashflows from the leases go up to AIP. It's another reason why investors like it," said the banker.
Given how infrequently the company issues and the fact the deal was capped by its green funding needs, it was always likely to attract plenty of interest. And so it did, with books finishing at more than US$2.2bn. That allowed the global coordinators, HSBC and Standard Chartered, to tighten pricing to plus 150bp for a US$500m deal.
AIP has one other sukuk issue in the US dollar market, a US$500m October 2029 deal from 2019, which was bid at a G-spread of 125bp, according to Refinitiv.
The banker said that, while the company has plenty of funding options, a capital markets transaction made sense given the shape of the Treasury curve between five and 10 years. "They can get scale at [the 10-year] tenor and pricing is more competitive than in the loan market," he said.
He also said the green label is another example of issuers in the region making advances in ESG funding. "They have been working on this for a while. A lot of their investments have been moving in the green direction. They wanted to time this [transaction] to fit their overall ESG strategy," the banker said.
AIP's green framework includes investments in green buildings, sustainable water management, pollution control and energy efficiency, among other things.
Successful return
Nogaholding, rated B+ by Fitch, saw even more demand for its 10-year sukuk, with books reaching more than US$3.75bn. That enabled the issuer to raise US$750m and also aggressively tighten pricing in the process. The sukuk landed at 6.625%, having started marketing at 7.25% area. This meant that the issue came just 40bp back of Noga's April 2029s.
"It was a very successful return to the sukuk US dollar Reg S market for Nogaholding," said a lead, who reckoned the deal was printed about 25bp inside theoretical fair value and versus where investors were pointing to during the roadshow.
He also said the deal had the longest maturity for a sub-investment-grade corporate in sukuk format, "highlighting not only the strength and appetite for Bahrain risk currently but also the increasing flexibility that Islamic investors have on tenors".
Faisal Ali, senior portfolio manager at Azimut, said: "Pricing was on the expensive side but in our view the deal will do well in the secondary given the relatively high [profit rate] and support from Saudi investors."
He also said that although "the company’s ambitious capex programme is likely to prevent any material deleveraging in the near term", it "should not have any problems in getting access to funding" given its importance to the Bahraini economy and likely government support.
Proceeds will go towards funding a tender offer for its US$750m of 7.625% November 2024s.
Bank ABC, Citigroup, FAB, HSBC, JP Morgan and National Bank of Bahrain were the lead managers.