By Mala Pancholia and Rachna Uppal
DUBAI, May 30 (Reuters) – Companies in the Gulf Arab region are looking at issuing Islamic bonds that target Malaysian investors as a way to diversify funding sources and tap Asian demand for Middle East debt.
Bahrain-based lender Gulf International Bank, owned by the government of Saudi Arabia, announced this week it had set up a new 3.5 billion Malaysian ringgit Islamic bond, or sukuk, programme, and could potentially issue a bond soon.
The bankâ€™s Chairman Jammaz bin Abdullah Al-Suhaimi said tapping the ringgit market was a strategic move to diversify funding avenues and currencies.
â€œThe Malaysian ringgit market is increasingly an attractive alternative for Gulf entities looking to raise money,â€ said Nick Stadtmiller, head of fixed income at Emirates NBD in Dubai. â€œMalaysian banks are highly liquid, and there is a developed set of other institutional buyers in the market.â€
Issuers in the Gulf are seeking to diversify their financing as dollar funding becomes scarce in the wake of the euro zone crisis. Islamic bond markets have been more resilient to the crisis and have seen increased activity since late last year.
The $300 billion domestic Malaysian ringgit bond and sukuk market i s dominated by Malaysian issuers, with a more than 95 percent market share, and more international ringgit issuance would offer investors a chance to broaden their portfolios, Stadtmiller said.
In February, state-owned oil and gas company Abu Dhabi National Energy Co (TAQA) raised 650 million Malaysian ringgit ($206.15 million) from a 10-year sukuk at a profit rate of 4.65 percent.
It increased the issue size from a planned 500 million ringgit as demand was much stronger than anticipated.
The ringgit sukuk was trading at 101.4 levels to yield 4.5 percent this week. In comparison, TAQAâ€™s $750 million 10-year 5.875 percent dollar-denominated b o nd , issued in December 2011 and maturing in 2021, was trading at 108.25 levels to yield 4.78 percent.
Abu Dhabi Commercial Bank, the emirateâ€™s third-largest lender by market value, issued a ringgit-denominated conventional, or non-Islamic, bond worth $101 million in its third ringgit foray in two years last month, carrying a coupon of 4.3 percent.
Globally, risk aversion has taken precedence in financial markets since the start of May as concerns over a Greece exit from the euro zone have dampened investor sentiment. The spread on the iTraxx SovX CEEMEA, Markitâ€™s index used to hedge exposure to East European, Middle Eastern and African sovereigns, has widened by more than 60 basis points since May 1 to around 339 bps this week.
In comparison, the average spread, on the HSBC Nasdaq GCC sukuk index, a regional benchmark tracking the return of an emerging GCC sukuk portfolio, has widened by only about 5.7 bps since the start of this month to 286.98 basis points on May 28, signalling relative stability in regional credits.
â€œAs global markets emerge from the financial crisis, there is a clear shift with Gulf issuers looking East. We see a growing appetite for quality, high-grade names from the GCC (Gulf Cooperation Council) among Malaysian investors,â€ said Sanjay Uppal, chief financial officer at Malaysiaâ€™s Hong Leong Bank.
â€œAs Asian investors get more comfortable and familiar with the GCC, the market presents an investment and diversification opportunity.â€
Gulf International Bankâ€™s (GIB) sukuk programme is rated AA1 by Malaysian rating agency RAM Ratings, the same as Taqaâ€™s programme. GIB is a wholesale bank, 97-percent owned by the government of Saudi Arabia.
â€œGIBâ€™s major customers are government and quasi-government entities, government-related entities, major private-sector corporations and financial institutions,â€ RAM Ratings said in a ratings statement.
Market sources say that investors are likely to view any eventual issue as Saudi risk given GIBâ€™s ownership.
â€œItâ€™s currently viewed as a Bahraini credit although essentially itâ€™s Saudi risk. I would actually think of it as quasi-sovereign risk or as close to sovereign risk as can be because of its ownership structure,â€ said one UAE-based trader, speaking on condition of anonymity.
In the last two years, National Bank of Abu Dhabi and Kuwaitâ€™s Gulf Investment Corp (GIC) have also raised ringgit financing. Both benefit from full or majority government ownership. ($1 = 3.1530 Malaysian ringgits)
(Editing by Dinesh Nair and Susan Fenton)