Better Rating Than Uncle Sam Propels IDB Demand: Islamic Finance

A better credit rating than U.S. Treasuries will help propel demand for Islamic Development Bank’s first dollar-bond sale in nine months as Persian Gulf investors clamor for the AAA sukuk.

IDB, as the Jeddah, Saudi Arabia-based lender is known, will sell five-year benchmark debt tomorrow, according to a person with knowledge of the deal, who asked not to be identified because the information is private. The yield on its June 2018 sukuk dropped two basis points this year to 1.62 percent at 3:12 p.m. in Dubai, compared with an eight basis-point slide to 4.85 percent in the average yield for Middle East sukuk, according to JPMorgan Chase & Co. indexes.

The lender, whose 56-member states include Turkey and Malaysia, carries the highest investment-grade rating at Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. This helps ensure that Gulf banks, flush with cash as customer deposits grow amid accelerating economic expansion, will seek to buy the bond, according to Ahmed Shehada at Qatar National Bank Financial Services.

“IDB is as good as U.S. Treasury paper, and a lot of banks regionally want it for their money management purposes,” Shehada, head of trading at QNB Financial Services in Doha, said by phone yesterday. “There is not a big selection of triple A rated sukuk. When you get one, it goes well.”

Sovereign Backing

U.S. Treasuries have a triple A rating at Moody’s and Fitch, while S&P has them at the second-highest investment grade of AA+.

Price guidance for the IDB sukuk is about 25 basis-points above the benchmark midswap rate, according to the person. CIMB, Commerzbank AG, First Gulf Bank PJSC, HSBC Holdings Plc, Natixis, National Bank of Abu Dhabi PJSC and Standard Chartered Plc are arranging the sale, he said.

“There’s not much risk with this paper, because it’s backed by a strong sovereign,” Amol Shitole, a credit analyst at SJS Markets Ltd. in Bangalore, India, said by phone yesterday. “If you look at performance of the last bond, despite tight yields it performed well,” helped by the lack of new issuance this year, he said.

Sales of dollar-denominated Islamic bonds from the region are off to their slowest start in five years, with a unit of Dubai Investments PJSC the only issuer to tap the market in 2014.

Political Instability

IDB boosted its sukuk program by more than 50 percent last year to $10 billion, the largest increase by volume since it was started in 2005. The bank’s financing commitments topped $9.8 billion in 2012, up from $8.3 billion in 2011.

The potential for political instability in the bank’s home base of the Middle East is one of the few risks associated with the credit, Shitole said.

Also, “private clients and fund managers won’t run behind this issue because there’s not much yield,” he said. “Banks will line up for it.”

The loan-to-deposit ratio at banks in the United Arab Emirates, the second-biggest Arab economy, dropped to 92 percent in November from 106 percent in March 2010, according to central bank data. The ratio in Saudi Arabia, the region’s largest economy, was 80 percent in December.

“IDB is Saudi, it’s supranational, and it gets a higher rating than the kingdom itself,” Shehada said. “It’s secure paper.”

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