Dar Al-Arkan demonstrates demand with rare HY corporate sukuk
Dar Al-Arkan got a blowout reception for its return to the market this week, proving that sharia-compliant transactions can work for even lower-rated credits in times of geopolitical uncertainty in the region.
The Saudi Arabian real estate developer mandated banks on Tuesday to lead a five-year US dollar sukuk transaction, with a series of investor calls taking place on the same day. The mandate came on the back of rising tensions between Iran and Israel over the weekend. However, market participants were confident that deals in the GCC were doable, with minimal risks expected to the wider region.
Books opened on Wednesday morning with initial price thoughts in the 7.75% area. The yield was later set at 7.375% as demand topped US$2.2bn, with the expected size stated as a minimum US$600m. The deal was later launched at US$750m as the books reached over US$2.6bn (excluding lead manager interest).
The leads on the deal were Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Alkhair Capital Dubai, Al Rayan Investment, Arqaam Capital, Bank ABC, Dubai Islamic Bank, Emirates NBD Capital, First Abu Dhabi Bank, JP Morgan, Mashreq, Sharjah Islamic Bank, Standard Chartered and Warba Bank.
Dar Al-Arkan is the largest listed real estate developer in Saudi Arabia, with assets of US$9.6bn, and is rated B1 by Moody’s.
Ahead of the deal’s launch, a senior portfolio manager based in Dubai said he expected it to be priced at around 7.25%, with fair value estimated to be in the 7.10%–7.15% range. He derived fair value by adding 20bp–25bp to the issuer’s outstanding 2029s, which he spotted at around 6.90%.
“There is limited supply of high-yield corporate sukuk, which creates a favourable technical support for the bond,” he said, adding that a yield north of 7% was attractive to both local and foreign investors.
The leads saw fair value differently by looking at not just the issuer’s own bonds but the “broader space” due to the lack of liquidity in the secondary market for sukuk, according to a banker at one of the bookrunners.
He had Dar Al-Arkan’s 2029s trading at around 7.07% at the deal’s announcement, with Arada (B1/BB–) at 7.30% and Omniyat’s (BB–/BB–) recent three-year sukuk debut at 7.40%. “Taking all these into consideration, fair value was around 7.25%,” he said.
The deal offered a more attractive yield compared to recent sukuk transactions. Turkey, for instance, also rated B1 by Moody’s, priced its own five-year sukuk at 6.85% on Tuesday for a US$2.5bn trade.