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CASE STUDY: Almarai’s USD500mn Issue Marks First Corporate International Sukuk out of Saudi

The benchmark-sized international debut sukuk received more than USD5bn worth of orders – a similar level of oversubscription to the recent Saudi Aramco jumbo bond, a tremendous start to the Saudi dairy giant’s new USD2bn Islamic finance programme.

May 21, 2019 // 1:39PM


Almarai, the Gulf’s largest dairy company, has for years been a prolific issuer of local debt. Over the past six years it has tapped the domestic markets five times, but the funding was almost exclusively sourced from local lenders, with the bulk coming from a single bank, pushing its indebtedness into SAR13bn territory.

“The downturn of 2016 was in many ways a wake-up call for the company, forcing us to look at private placement options and regional banks, as well as international sukuk – even as that market was growing more expensive by historical standards,” says Almarai Executive Manager Paul Gay.

Along with other Saudi exporters, it struggled due to a number of external and local challenges, including the implementation of VAT across the KSA and broader fiscal consolidation within the Kingdom, as well as political and geopolitical tensions (including loss of access to the Qatari market). Almarai’s first-quarter net income fell more than 9% over 4Q2018, according to Reuters, even as revenues climbed 3.8% to SAR3.35bn during the period.

In September 2018 the company redeemed SAR1.7bn of perpetual senior sukuk issued in 2013. Meanwhile, the cost of funding continued to edge up steadily for the company and rose by SAR28mn in 1Q2019, mostly due to the increase of interest-bearing debt (following the repayment of perpetual sukuk), a higher Saudi interbank borrowing rate and lower capitalisation of funding costs for qualified capital projects, according to the company’s statements.

Challenges Notwithstanding

Convincing boards and key stakeholders of the need to create an international credit curve and diversify funding is challenging in itself, particularly as borrowers often have to pay a premium compared to the domestic funding it can already access. In Almarai’s case, a combination of regained stability in the global markets, improving interest and exchange rates and narrowing of the gap between local and international funding costs alleviated some of those concerns.

Another key factor was the recent transaction by the Saudi sovereign, which set a benchmark and helped to build a curve for major local corporates.

Finally, whereas some of the region’s companies struggle with the disclosure elements of the issuance process, Almarai had an advantage of already having high levels of transparency and compliance by the time it decided to come to market. A lot of the required information was already available internally and therefore was easy to relay to relevant stakeholders.

The company cited the likes of DP World and Majid Al Futtaim as regional peers it was hoping to emulate on its debut deal.

Finally, Almarai had a clear objective of blazing the trail for Saudi corporates to the international sukuk market, but was facing external constraints in terms of timing: namely, geopolitical volatility and market congestion. It had to find the perfect window to issue.

Transaction Breakdown

On its first attempt to come to market in November 2018, Almarai picked its partner banks very strategically. HSBC was chosen as a highly reputed global lender with a vast network of international partners; FAB and GIB had a strong regional presence; Standard Chartered could help tap into Asian pockets of liquidity; JP Morgan was selected for their expertise in Europe.

Still, their first attempt at issuing in late November did not pan out as planned, with global EM jitters and a flare-up in tensions with the West pushing yields higher and forcing most prospective issuers to scrap or delay their plans.

The treasury department instead decided to bide its time and wait for conditions to improve; the KSA sovereign USD7.5bn issuance in January 2019 helped to “test the waters” and extend the yield curve for the Kingdom, opening the way for Almarai to follow suit.

The issuer had worked out the format of the Sukuk – a Murabaha-Iljara – early in 2018, and then settled on launching a USD500mn sukuk as part of a USD2bn programme. Notably, the still significant sukuk repayments outstanding were disassociated from the use of proceeds for the international issuance in order to get the most competitive pricing. They also resisted calls from investors to upsize the deal and extend tenors, or offer a more complex structure that would command a premium.

Reward in Pricing

The pricing of the deal was guided by the all-in-clause: it allowed for an acceptable premium, as the issuer expected, but the price would not go above a pre-agreed range.

The question remained, though, on IPTs: should the issuer go tight, or wide? Naturally, Almarai’s preference was to go with the tighter end, while the banks pushed back as they were keen on a wider price margin. The concern was around the ability to drive the price down from a wide base; nevertheless, Almarai trusted its partner banks, offering 225bp over mid-swaps, which enabled the deal team to build up a huge orderbook (11x oversubscribed), leading to significant tightening.

Even as price tightened 25bp to 200bp, the book actually increased; there were indications that the coupon could be squeezed even further, perhaps to the 170-175bp range, but here secondary market considerations came into play. The banks warned against going too low and pricing inside peers like QNB. In the end, they settled on 180bp, and accepted a 5-10bp premium, which proved to be a tough, but sensible decision.

While the company had set a target of diversifying its investor base from the start, it was not necessarily very familiar with a lot of the major funds and institutional investors that it wanted to lure, which is where its strong relationships with the partner banks really paid off.

On the back of the lenders’ efforts during the roadshows, which took place in Hong Kong, Singapore, Dubai and London, the issuance managed to draw strong demand from Asian and European investors. Its partnership with FAB and Standard Chartered was perhaps less prominent, but the geographic expertise of said lenders no doubt helped secure strong demand.

As a result, Almarai’s management team was somewhat taken aback by the diversity of the final orderbook, as it did not expect such strong participation of European and Asian accounts. Allocation was guided by the overall objective of diversification. Accounts based in Europe took over a third of the allocations (36%), local Saudi investors picked up 6%, and another 33% was distributed around the GCC region. Asia picked up another 23% and the remaining 2% went to US offshore investors.

In terms of type, the notes attracted more fund capital than expected (60%), and fewer banks than anticipated (32%). Insurance and pension funds (4%) and Central Banks & corporates (4%) picked up the remaining allocations.

Some of the questions that were asked during the roadshow revolved around the planned use of proceeds and repayment ability, which the issuer’s strong credit record and impressive growth story helped alleviate. A balanced management team on the roadshow, which included the company CEO, also helped to provide additional comfort to prospective investors.

With a USD2bn programme in place, Almarai is keen to come back to the international market by 2020, and will consider options for extending its maturities. This deal was a first for the borrower and the country, and paved the path for more Saudi companies to come to the international market, including the recent blockbuster issuance from Saudi Aramco, which saw a similar level of oversubscription to Almarai.

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