Saturday, January 14, 2012

Largest sukuk ever - does it matter?

I am not usually impressed with most of the "first" or "biggest" news items relating to sukuk because there is usually more need for more plain vanilla sukuk and less need for overly complicated sukuk.  We all remember how the Nakheel sukuk worked out, and one of those was both a "biggest" and a "first".  However, the reports from Zawya that Saudi Civil Aviation Authority GACA is on the verge of issuing the first sovereign sukuk from Saudi Arabia, as well as the largest ever with a reported size of SAR 15 billion ($4 billion). 

This sukuk is significant because Saudi Arabia is the largest GCC economy and has been less active in both corporate and (of course) sovereign issuance of sukuk.  The $4 billion represents almost the entire total issuance for December ($5 billion) and a good portion of the average monthly issuance globally during 2011 ($85 billion total, or about $7.1 billion per month).  The sukuk is guaranteed by the Saudi Ministry of Finance, giving it a credit quality likely on par with the Saudi government's Aa3 rating from Moody's and AA- from S&P. 

The sovereign sukuk should provide a high quality for investors like takaful providers and pension funds, but not all of it is likely to end up being held-to-maturity and the sukuk, if it listed on the electronic market for sukuk with Tadawul, could provide a boost to the trading volumes in sukuk (e.g. an investor holding a corporate sukuk that wishes to remain invested in sukuk but not exposed to a corporate credit can sell the corporate sukuk and buy a sovereign sukuk, which they are not currently able to do). 

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