IslamicFinance.de

High Financing Costs May Crimp Future Issuance Of Project And Infrastructure Sukuk In The Gulf

LONDON, April 28, 2009--The global slowdown, along with local macroeconomic factors, appears to have curtailed the anticipated growth of sukuk (including those for infrastructure and project finance) in the Gulf region, says a report published by Standard & Poor's Ratings Services titled "Islamic Sukuk Come Of Age In Infrastructure And Project Finance." What's more, investor appetite for these instruments may continue to be adversely affected by the high costs of financing, predominantly local investor appeal, a real estate downturn, hydrocarbon prices, and accounting issues.

"In our experience, the costs of structuring and issuing sukuk remain high relative to conventional bank loans and bond issuance," said Standard & Poor's credit analyst Karim Nassif. "Legal and accounting fees contribute to this higher cost structure, as does uncertainty regarding the perceived risk associated with these instruments. Moreover, the lack of standard structures, perceived differences in approach to sharia compliance, and a relatively illiquid secondary market may discourage investor appetite for sukuk."

Project and infrastructure sukuk issuance in the Gulf has stalled. After years of rapid growth, the past few quarters have been difficult in the Gulf Cooperation Council (GCC) states and the project and infrastructure sukuk markets have not grown in 2008 to the levels anticipated. Total sukuk issuance fell 56% to $14.9 billion in 2008 compared with the previous year. Nevertheless, we believe the GCC will be the focus of most infrastructure and project finance sukuk activity in the short to medium term.

Sukuk-based financing remains the most attractive means of raising funding for medium- and long-term capital costs for GCC issuers. It forms the basis of a number of high-profile, hydrocarbon-related GCC project transactions, often split equally with debt-based bond and bank financing. As
the Islamic infrastructure and project finance market develops, we anticipate there will be more transactions funded exclusively by sharia-complaint means.

Despite recent market developments, the report points out, high-profile sukuk issuance continues in the region. Both the Saudi Electricity Co. and Dubai Electricity and Water Authority issued sukuk in late 2007 and during 2008 to fund capital expansion in Saudi Arabia and Dubai, respectively.

The report illustrates our analytical approach to rating infrastructure and project finance sukuk via two case studies on two recent transactions--Tabreed 08 Financing Corp., a special purpose entity wholly owned by Tabreed whose sukuk issuance is being used to fund the construction of district
cooling plants; and Sun Finance Ltd., a securitization is to allow Sorouh Real Estate PJSC to monetize future cash flows for from the sale of real estate plots to property developers.

The report is available to RatingsDirect subscribers at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to research_request@standardandpoors.com. Ratings information can also be
found on Standard & Poor's public Web site at www.standardandpoors.com; select Ratings in the left navigation bar, then Find a Rating. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7)
495-783-4011.