Qatar has sold one of the largest Islamic bonds on record with surging demand for the $4 billion issue allowing bankers to trim the yield of the bond to the lowest paid for the gas-rich Gulf emirate.
The two-part bond, maturing in five and 10 years, attracted orders of $25 billion, underlining the robust appetite for strong borrowers in emerging markets and securities that comply with Muslim strictures against interest.
Although the Gulf did not disclose how it intends to use the $4 billion proceeds, the emirate faces vast spending requirements at home to prepare for hosting the 2022 football World Cupand continues an international shopping spree of investments in blue-chip companies.
Islamic bonds, called sukuk, are backed by some sort of tangible asset—land in Qatar’s case—structured to pay a “profit rate” rather than a classic fixed coupon and have to be approved for sale by Muslim clerics.
Islamic banks in the Gulf and Malaysia—the two largest markets for Islamic finance—often have excess deposits but a dearth of highly rated instruments that adhere to their requirements. Qatar is rated AA by Standard & Poor’s and Aa2 by Moody’s.
The $2 billion five-year sukuk was priced to yield 2.1 percent and the $2 billion 10-year sukuk yielded 3.24 percent on issuance.
“This is phenomenally low,” said Andrew Dell of HSBC, one of the bookrunners on the deal. “It’s a good confirmation of the investor confidence in Qatar.”
The deal was also helped by the scarcity of debt issued by Qatar, which is the world’s largest exporter of liquefied natural gas.
Although Qatar sold $5 billion and $7 billion of conventional bonds in November and in 2009, respectively, many emerging market funds are attracted to the relatively high yields offered by Qatar compared with its high ratings.
Islamic debt is particularly rare. Qatarhas sold a smattering of Islamic bonds to local banks in recent years but last sold a sukuk to international investors in 2003.
“They’ve done several extremely successful conventional issues in the past and wanted to diversify their funding to Islamic accounts, which can only buy sukuk,” Mr. Dell said.
In addition to HSBC , Standard Chartered , Deutsche Bank and local institutions Barwa Bank and QInvest were bookrunners on the deal.
“They have huge infrastructure spend coming up so why not get the markets to finance part of this, and cheaply too,” said Yavar Moini, executive director at Morgan Stanley in Dubai.
The sukuk will also help nurture the local Islamic finance market by providing a “sukuk curve” off which other companies or state entities in Qatar can price their own Islamic bonds.
The sale is the latest in a spate of Gulf companies and government-backed entities choosing to sell sukuk over conventional debt. Saudi Arabia sold its first fully sovereign-guaranteed, local currency sukuk earlier this year. The 15 billion Saudi Arabian riyal ($4 billion) General Authority of Civil Aviation sukuk is the largest single tranche Islamic bond issued to date.
Qatar’s issuance “sends a strong signal to other sovereign issuers who maybe plan to issue a sukuk since market appetite for new sovereign deals is very strong,” said Sergey Dergachev, an emerging market debt fund manager at Union Investment.