By Mala Pancholia / Reuters
DUBAI: Massive demand for Saudi Electricity Co’s (SEC) first international sukuk issue may prompt the company to include a rare long-dated tranche — and could encourage issues by other utility companies in the Gulf.
Since last week, roadshows held by SEC in Asia, the Middle East and Europe have underlined the fact that its sukuk has almost everything possible going for it: it is the first issue of dollar-denominated Saudi paper since 2010, it is a rare investment-grade issue from that country, the company is majority-owned by the Saudi government, and the debt is a sukuk, which means it will tap a pool of Islamic investors that have bought Gulf debt eagerly in the past six months.
“The prevailing tight yields as well as market liquidity, especially within the GCC, is a key reason for SEC to tap global debt markets,” said Chanaka Dassanayaka, fund manager at Alistithmar Capital in Riyadh.
“The dollar-denominated issuance allows for more foreign participation, and given it is a key Saudi entity with a history of several successful local issuances, they can bargain for better terms with the market participants.
“In addition, at a time when ratings of European issuers are being downgraded, international high-grade issue seekers are definitely eyeing this paper.”
Since SEC is majority-owned by the Saudi government it is seen as having a high probability of state support, as the kingdom’s national electricity provider. The prospectus provides investors with a put option if government ownership falls below 50 percent, said Dassanayaka.
SEC’s sukuk trust certificates are rated AA- by Standard & Poor’s, and one notch lower at A1 by Moody’s Investors Service. SEC is coming to market 17 months since another Saudi entity tapped international markets; Saudi Basic Industries Corp (SABIC) launched a $1 billion, five-year bond in October 2010.
SEC has big investment needs in coming years because of a growing population and surging demand for electricity used in desalinating water supplies. State-run Saline Water Conversion Corp said this month it plans to nearly double energy-intensive desalinated water production to almost 6 million cubic meters per day by the end of 2015.
SEC appears to face no immediate difficulty in financing its investment domestically; since 2007, it has issued 19 billion riyals ($5.2 billion) worth of sukuk and has benefited from two 15 billion riyal, 25-year interest-free soft loans from the Saudi government, with a further 51 billion riyal line granted in 2011, according to Moody’s.
However, its international sukuk looks like a prudent step to diversify its funding sources and potentially lower its funding costs while US interest rates are still ultra-low. US five-year interest rate swaps are at about 1.35 percent while the equivalent Saudi riyal swap is at 1.96 percent.
“The currency of issuance as well as the rating suggest that the company is looking to tap a wider pool of international investors, as opposed to the local investor pool that had dominated subscription to previous Saudi riyal-denominated sukuk,” said Karim Nassif, primary credit analyst at S&P in Dubai.
Pricing
Pricing of SEC’s sukuk could be spectacular, some market sources say, eclipsing the pricing of 190 basis points over midswaps seen for National Bank of Abu Dhabi’s $750 million, five-year conventional bond last week. NBAD is rated Aa3 by Moody’s, one notch above SEC’s sukuk.
“SEC could price tight with the kind of advantages it possesses. A fixed rate at about midswaps plus 100-150 bp range in the case of a five-year paper is likely,” said Dassanayaka. Some other analysts, however, are predicting pricing closer to 190-200 bps over midswaps.
A tantalizing prospect for the sukuk market is that SEC might include a tranche that is longer than the usual five-year maturity for Islamic bond issues in the region.
“We might see a surprise of a long-dated floater as well, taking a bet on the US policy changes beyond 2014,” Dassanayaka said.
John Bates, head of fixed income at Silk Invest, said he had heard unofficial talk of a $1 billion issue which, he suspected, might include a 10-year as well as a five-year tranche.
“Providing the pricing is right there is little doubt that 10-year money would be supported by the international investors, despite the shorter risk tendencies of the local banks,” he said.
Bates noted it was hard to find comparable debt to SEC but Qatar’s $2 billion sovereign bond maturing in 2022, rated Aa2 by Moody’s, was trading at a yield of roughly 4.0 percent.
“One would expect some premium over this level together with the fact that SE is a government-backed entity, not the Kingdom itself,” he said.
Nigel Denison, head of treasury and wealth management at Bank of London and the Middle East, said he had heard suggestions that SEC’s sukuk would be comprised of two tranches, one five-year for $1 billion and one 10-year for $750 million.
Others
SEC’s sukuk would join debt from Dubai Electricity and Water (DEWA), the only other fully integrated regional utility which services end-users, in the international market. DEWA, a popular issuer from the region rated Ba1 by Moody’s, last tapped the market in October 2010 with a $2 billion, dual-tranche bond.
Other Gulf state-owned utilities including Qatar Electricity and Water Company and Abu Dhabi Water and Electricity Authority (ADWEA) have secured credit ratings, and could follow SEC and DEWA, analysts believe.
ADWEA has picked HSBC to advise on the $2.2 billion refinancing of its Shuweihat 2 loan and plans to issue a bond in a first for a Gulf Arab power project, bankers involved said. Financing is expected to be a mixture of bank loans and the bond, and pitching for the bond portion is ongoing, two bankers said. –Additional reporting by Rachna Uppal
