By ART PATNAUDE
Turkey is gearing up to sell its first bond compliant with Islamic law, targeting emerging-market investors as the country tries to diversity its funding sources.
The sale of a dollar-denominated sukuk, as Islamic-compliant bonds are called, is due to be completed on Tuesday and could raise more than $1 billion, said one investor.
About half, or $13 billion, of the Middle East’s $24.3 billion of bonds sold in the first six months of 2012 were sukuks, according to data provider Dealogic, compared with $3 billion in Islamic bonds in the year-ago period out of $13 billion in deals. Conforming with Shariah law, which prohibits interest payments, sukuks also have attracted interest from investors in nations outside of the region, including Malaysia and Indonesia, which have large Muslim populations.
In the sukuk, Turkey will sell certificates to investors, who will then lease them back to the issuer at a fee. This fee takes the place of a traditional interest rate.
“Turkey is looking to broaden its investor base, and this makes good sense for the borrower,” said Jeremy Brewin, head of the emerging-market division at Aviva.
A banker involved in the deal said there has been strong demand for Turkey’s debut sukuk offering, with orders ballooning to $6 billion. More than half of the orders came from the Middle East, $1 billion from Asian investors and the rest from the U.S. and Europe, the banker said.
Turkey conducted a series of investor meetings last week in the Middle East and Asia in a run-up to the deal. Much of the country’s debt is short term, and the government wants to raise funds with longer maturities to improve management of its finances.
“There’s a lot of money floating around out there and not a lot of places to invest in for those forbidden from other markets,” said a banker working on the deal.
Sukuks are backed by assets. In Turkey’s case, the banker said this mostly entailed government buildings. In the past, the sovereign assets also have included airports and hospitals.
Investors in Persian Gulf countries will “be supportive because there is a great deal of interest in Turkey from that part of the world,” said Daniel Broby, chief investment officer at London-based emerging-market investor Silk Invest, which has $130 million in assets under management.
The sukuk market was hit hard during the financial crisis beginning in 2008. Interest from investors has slowly revived over the past two years. Turkey’s deal shows the market is continuing to rebuild and paves the way for future sukuk offerings by the country and its companies.
“Doing a sovereign sukuk is positive because it establishes a benchmark, and behind that you can get corporates to issue,” said Abdul Kadir Hussain, chief executive of Dubai-based asset manager Mashreq Capital.
The sukuk will yield about the same as comparable Turkish government bonds, which pay an interest rate of 2.87%, according to market participants. Initial price guidance on the sukuk, maturing in 5½ years, is between 1.9 and 2.0 percentage points above the midswap rate, a benchmark in bond deals, which is about 1%.
“From a pricing standpoint it’s not something you’re really going to jump up and down about,” said Abdul Kadir Hussain, chief executive of Dubai-based asset manager Mashreq Capital.
Citigroup Inc., C -2.10% HSBC Holdings PLC and Liquidity House, a Kuwait Finance House subsidiary, are lead managers of the sukuk deal.
A total of 17 Mideast sukuk deals have been sold in first half of this year, compared with six deals in the year-ago period, according to Dealogic. Saudi Arabia was the biggest issuer, raising 15 billion Saudi riyals ($4 billion) to fund an airport expansion and $1.75 billion for Saudi Electricity Co., 5110.SA +0.76% the kingdom’s biggest utility company.
—Emre Peker, Tim Falconer and Carol Dean contributed to this article
via Turkey Prepares to Sell First Islamic Bond – WSJ.com.