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Mall Built on Saudi Sand Spells Sukuk Success: Islamic Finance

Dar Al Arkan’s third Islamic bond sale in a year is attracting buyers as investors bet the Saudi Arabian company’s real estate assets outweigh a junk credit rating at Standard & Poor’s.

Dar Al Arkan Real Estate Development Co. (ALARKAN) is poised to sell a benchmark U.S. dollar-denominated sukuk due 2019, according to two people with knowledge of the offering, who asked not to be identified because the information isn’t public. The yield on the company’s May 2018 sukuk slid 107 basis points this year to 6.17 percent at 12:29 p.m. in Riyadh, according to data compiled by Bloomberg. Rates on Middle East Islamic bonds fell 50 basis points in the period to 4.14 percent, JPMorgan Chase & co. indexes show.

Dar Al Arkan, which mostly develops and then sells land so that others can build on it, opened the largest mall in Riyadh in 2012 and is benefiting as the kingdom implements a 2011 plan to spend $130 billion on social causes, including building homes amid a shortage. The developer, rated four levels below investment grade at S&P, owns more than $3.5 billion of property in Saudi Arabia, the majority in Riyadh and Jeddah, according to financial statements.

“They have a huge landbank, even after recently accelerating sales,” Montasser Khelifi, a senior manager for global markets at Dubai-based Quantum Investment Bank Ltd., said by phone yesterday. “That’s a good guarantee in the eyes of sukuk investors.”

Photographer: Waseem Obaidi/Bloomberg

The Al Qasr residential home project, built by Dar Al-Arkan Real Estate Development Co., stands in the Al-Swaiyadi district of Riyadh. The developer, rated four levels below investment grade at S&P, owns more than $3.5 billion of property in Saudi Arabia, the majority in Riyadh and Jeddah, according to financial statements. Close

The Al Qasr residential home project, built by Dar Al-Arkan Real Estate Development... Read More

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Photographer: Waseem Obaidi/Bloomberg

The Al Qasr residential home project, built by Dar Al-Arkan Real Estate Development Co., stands in the Al-Swaiyadi district of Riyadh. The developer, rated four levels below investment grade at S&P, owns more than $3.5 billion of property in Saudi Arabia, the majority in Riyadh and Jeddah, according to financial statements.

Falling Profit

Dar Al Arkan, Saudi Arabia’s second-largest listed real estate developer, issued $300 million of three-year notes in November, and $450 million of five-year debt 12 months ago.

The company repaid a $1 billion sukuk in July 2012, the price for which fell below 70 cents on the dollar in 2009 on concern over its financial position. The developer said in April it’s seeking to diversify income streams and increase recurring revenue. Full-year profit has declined since 2009, according to data compiled by Bloomberg.

“There is starting to be some diversification in the revenue stream,” Khelifi said. “Though in the last few years they have struggled to deliver some of their large scale projects. It shows that maybe they don’t have the firepower to develop the really big projects.”

A spokesman for Dar Al Arkan didn’t immediately respond to a call and an e-mail seeking comment. The yield on the 2018 bond rose four basis points yesterday after the company said it was meeting investors before today’s sale.

The company had about $1.2 billion of debt outstanding yesterday, according to data compiled by Bloomberg. That includes $450 million of sukuk maturing in February. Dar Al Arkan’s cash and cash equivalents more than doubled to 2 billion riyals ($533 million) in the first quarter from a year ago.

“It’s an asset rich company, and even their land value is understated because they use the historical cost price,” Doug Bitcon, a Dubai-based fund manager at Rasmala Investment Bank Ltd., said by phone yesterday. The latest bond issue “positions them well for next year, there are no worries on cash flow,” he said.

To contact the reporter on this story: Samuel Potter in Dubai at spotter33@bloomberg.net

To contact the editors responsible for this story: Claudia Maedler at cmaedler@bloomberg.net James Doran, Samuel Potter

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