Posts Tagged ‘sukuk’

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Full steam ahead: Gulf petrochem loves sukuk

December 15, 2009

Despite its last minute bailout from Abu Dhabi, Dubai’s Islamic bond meltdown should cast the severest possible doubts on the viability of a sharia compliant financial model.  Instead, it’s full steam as Gulf petrochemical businesses turn to Islamic bonds, or sukuk, to finance their long-term capital projects.  This just in from Emirates Business:

The petrochemical industry in the Gulf will need to finance its high-capacity new projects through sukuk as other finance options become increasingly difficult to obtain, finance officials said.

The view comes close on the heels of an announcement of the region’s association of petrochemical producers – Gulf Petrochemicals and Chemicals Association (GPCA) – that the region will expand its petrochemical production capacity by 10 million tonnes the next year. The region’s total petrochemicals production capacity is currently pegged at 63 million tonnes. This will be almost doubled to 115 million tonnes by 2015, according to GPCA.

“Sukuk is the most viable among the financing alternatives for petrochemical projects in the region. That’s because options of long-term credit financing have dried up,” said Khalid Hamad, Executive Director (Banking Supervision) with the Central Bank of Bahrain.

Petrochemical industries – particularly the ones with federal support – in the Gulf have in the past resorted to issuing the Shariah-compliant Islamic bonds to finance costly projects. In 2006, Saudi petrochemical giant Saudi Basic Industries Corporation (Sabic) issued its first sukuk. In 2007, the petrochemicals giant issued another sukuk to finance its $11.60 billion (Dh42.6bn) acquisition of GE’s plastics business. Equate, the Kuwaiti petrochemicals major, was one of the first petrochemical companies in the Gulf to issue a sukuk.

The sukuk market in is currently valued at more than $100bn and it is projected to reach $150bn by 2010. In 2006, 80 sukuk issues raised $18.15bn globally, with a large share of this issuance occurring in the Gulf.

Hamad said he expects quasi-government and private companies in the region to issue Islamic bonds to finance their projects. “As we speak, it’s happening. Private companies are issuing sukuks,” he said.

“Issuing long-term bonds is difficult these days because of a lack of liquidity. Furthermore, banks are reluctant to lend for long term,” he said.

Abdulkarim Mubarak, Chief Financial Officer of Equate, said sukuks need to evolve as a viable financing option. “Most of the sukuks being issued are short-term debts and amount of money raised is not very high. We were one of the first petrochemical companies in the region to issue a sukuk. But then petrochemical companies need to look at other options as well because you cannot raise a very high amount through sukuks in the current scenario,” Mubarak said.

Notice that everything is becoming an excuse for more sukuk.  Tired of irresponsible lending practices?  Try sukuk, its advocates say.  Want to boost your banking sector?  Try sukuk.  Want to expand market share?  Try sukuk.  Trouble with obtaining capital?  Try sukuk.  Burned by sukuk?  Try even more sukuk.

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