Negative Real Yield and Saudi Sovereign Sukuk (4-6)

Mohammed Khnifer

@MKhnifer

• Before issuers tap the global fixed market, lead arrangers would have been selected first as they will play a vital role in marketing the debt instruments. Some regional GCC banks would be able to underwrite deals (notably the UAE and Saudi financial institutions), while other GCC banks may face some restrictions from their respective central banks on underwriting cross-border deals.
• Prospective issuers may wish to conduct some research to see the most active underwriters within a geographical area (for instance, Bloomberg’s US dollar/international Sukuk issuance league table).
• The market standard in GCC debt transactions has seen underwriting/lead orders provided mostly by regional banks that have pre-established interest to purchase the Sukuk for their treasury books.

Institutional Investors

Institutional investors tend to support more investment grade (IG) debt issuers. For anchoring deals, investors (with an IG mandate) have certain criteria such as credit rating of the issuer, right pricing levels, market conditions on the day of pricing, etc.

Under International Capital Market Association (ICMA) rules around European joint lead managers’ (JLMs) orders, only unsolicited trading orders that reflect genuine demand for the transaction would be included in orderbook updates to investors.

However, solicited lead orders from JLMs will no longer be reported to the market.

Types of Orders

Traditionally, GCC JLMs tend to provide the so-called ‘ALM Order’ and/or ‘JLM Order’. The purpose of the JLM Order is to assist the issuer during the book-building process (e.g. to provide a lead order of up to 20% of the issuance size), whereas the ALM Order tends to support the transaction by providing an underwriting commitment (e.g. up to 10% of the issuance size).

Preparation

Prior to the issuance or the extensive marketing, it is advisable for the issuer to seek commitments from its relationship institutions and government entities (i.e. its already-established investor base).

Traditionally, central banks tend to deploy liquidity into high-quality Sukuk. Furthermore, the issuer should try to appoint banks which are able to come in with large ticket sizes/anchor orders as JLMs so that the transaction carries the momentum it deserves from as early as when the books go live.

Launching the Transaction

JLMs should also be able to source out demand from key Islamic investors and accumulate large anchor interest to drive momentum as soon as the books open. Depending on the credit profile of the issuer, it is advisable to select a global JLM that has deep access to diverse pools of liquidity (i.e. a distribution platform with unique connectivity across both emerging markets and IG investors).