A flurry of sukuk issues from the Gulf this week shows borrowers are worried about limited global liquidity and future access to debt markets, and are turning to Islamic finance as a source of money that is relatively untouched by the global turmoil.

Gulf bond issuance was lower than expected last year as many companies held off on coming to market, unwilling to pay high prices due to poor market conditions; total debt issuance from the Gulf region last year was $25.8 billion, short of analysts' estimates that volumes would be well above $30 billion.

This month's sukuk activity suggests companies may no longer be prepared to wait to issue debt, which could make 2012 more active. And as Western investors struggle with the euro zone debt crisis, dampening the conventional bond market, many Gulf firms may seek Middle Eastern and Asian money through sukuk.    

Emirates Islamic Bank (EIB), a unit of Emirates NBD, Dubai's largest bank, priced a $500 million sukuk at 350 bps over midswaps on Tuesday, to pay a profit rate of 4.72 percent.

Abu Dhabi's First Gulf Bank (FGB) sold a $500 million, five-year sukuk, its second under a $3.5 billion programme set up in July 2011, while Islamic mortgage lender Tamweel is eyeing a $300 million sukuk, guaranteed by majority shareholder Dubai Islamic Bank.

Outside the UAE, Saudi Arabia's General Authority for Civil Aviation launched its debut sukuk offer this week, backed by the Saudi Ministry of Finance.

'Borrowers are aware of the general liquidity crunch in the market, and through using a sukuk format, want to cast as wide a net as possible to take advantage of whatever liquidity there is at present,' said Chavan Bhogaita, head of the markets strategy unit at National Bank of Abu Dhabi.     

'There are concerns over the persisting uncertainties regarding the euro zone, so many issuers may think it is best to print a deal early in the year.'     

The prospect of more new sukuk supply has already weakened the secondary market slightly. The yield on FGB's $650 million 3.797 percent sukuk maturing 2016 rose to 3.056 percent on Tuesday before falling back to 3.04 percent on Wednesday. FGB priced its new sukuk in line with its final guidance of 287.5 bps over midswaps.

The yield on Sharjah Islamic Bank's $400 milllion 4.715 percent sukuk maturing 2016 rose to 3.949 percent on Tuesday from 3.883 percent on the previous day.     

A Dubai-based fixed income trader calculated that FGB paid a new issue premium of about 20 bps for its new sukuk, which may have disappointed some investors as it was smaller than many had expected.          
EIB's sukuk attracted orders of $1.5 billion; nearly 60 percent was allocated to Middle East investors, followed by Asian investors with 23 percent. Banks were allocated nearly 70 percent of the paper, according to lead arrangers.

'Most companies are issuing sukuk because they believe there is still interest from Asia in particular to buy into that paper, as Europe's available liquidity is much less than what it was a year ago,' said Mohammed Ali Yasin, chief investment officer at CAPM Investment.

Globally, Islamic bond issuance rose to $23.3 billion last year from $13.9 billion in 2010, according to Thomson Reuters data. HSBC Amanah, the Islamic arm of HSBC, predicts total corporate and government sukuk issuance will climb to $44 billion this year -- although much of that would come from a single Malaysian company, Projek Lebuhraya Usahasama Berhad (PLUS Berhad), which is issuing a 30.6 billion ringgit ($9.7 billion) sukuk.

Sixty percent of this year's issuance is expected to come from Malaysia and 32 percent from the Middle East and North Africa, HSBC Amanah said.

In the Gulf, potential sukuk issuers waiting on the sidelines include Dubai mall developer Majid Al Futtaim Holding, Abu Dhabi's Al Hilal Bank and Qatar Islamic Bank.

Although European money has retreated from the international debt market because of the region's problems, European banks are actually awash with cash after taking 489 billion euros in the European Central Bank's first-ever three-year liquidity operation last month. If their appetite for risk returns later this year, some of that money could find its way into sukuk.

'If the European crisis eases and investor risk appetite improves in the second-half of this year, the return of European funds could encourage more regional issuers to tap the debt markets, and we may also see some recent issuers coming to market again,' Yasin added.  -Reuters