Sharjah in Eurobond market for a 10-year sukuk deal
Abu Dhabi, 06 March 2018
The Emirate of Sharjah has announced the initial price thoughts (IPTs) for a 10-year RegS US$ benchmark size sukuk as below after completing investor roadshow in the UAE and the UK.* 10Y 2028 US$ Benchmark sukuk @ MS+150bps areaOn a relative-value basis the IPTs provide some premium over the existing Sharjah sukuk and other peer bonds from the GCC market, as well as Emerging Markets (please see the chart on next page). We expect the deal to attract good demand due to its sukuk format as Islamic investors in the region seem to have liquidity to put to work, and in general such paper has been rather scarce. Indeed, we haven’t seen much of sukuk issuance of late from the GCC as a whole. Sukuk deals in the Eurobond markets have now a wider appeal as we now see active participation from international non-Islamic investors. For example, Indonesia’s $3bn 5-&10-year sukuk deal last month attracted orderbooks of ~$7bn and Islamic investors got less than 30% of the allocation due to strong demand from US and European accounts.Another factor that we believe favours Sharjah in this transaction is the combination of investment grade rating (A3/BBB+ by Moody’s/S&P) and its absence from the Eurobond market since January 2016. Earlier this year Sharjah also issued the region’s first ever panda bond – bonds issued in CNY by non-Chinese issuers, hence the issuer is now familiar to Asian investors and this should bring in some solid demand from Asia.When Sharjah officially announced its investor roadshow last week, it indicated that the meetings will follow either a single or dual-tranche sukuk offering across 5, 7 and/or 10 years tenor, subject to market conditions. The announcement of a single-tranche 10-year sukuk deal clearly shows where the demand is. In our opinion, it is indeed prudent of the Government of Sharjah to announce a single-tranche deal as the emirate’s funding needs are not as stretched as some of its peers from the GCC.
Furthermore, the secondary market for GCC and EM bonds are also reflecting similar kind of dynamics. Shorter dated papers have underperformed, and investors are trying to identify pockets of value in the longer tenor. For example, the OMAN 2028s issued in January has been in demand of late after experiencing some softness amid a broader Treasury sell-off. However, the OMAN 2023s are still lagging. The outstanding Sharjah sukuks – the 2021s & 2024s – have also suffered due to the shorter tenors. For example, yields on the 2021s has gone up around 60 basis points in past three months.
We thus think that the timing of the deal is indeed very interesting from a pricing perspective due to the aforementioned factors. In our opinion, the issuer may need to leave something on the table in order to ensure the success of the deal not just in primary but also in the secondary market given that any renewed bond sell-off would put downward pressure on prices and make them less appealing on a relative value basis.
Chavan Bhogaita, Head of Market Insights & Strategy
Rakesh Sahu, Analyst, Market Insights & Strategy
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