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20| pfi | Middle East Report 2009 Sukuk in Saudi

KSA sukuk structuring T

he recent downturn in the global econo- my has had a negative impact in relation to the number and size of sukuk being issued both globally and from within the GCC. That said, the Kingdom of Saudi Arabia, in our opinion, may emerge as a

key player in contributing to an increase in corporate sukuk issuance originating from the GCC.

The GCC and global sukuk market Sukuk have gained great popularity over the past five to 10 years. During this period the volume of GCC sukuk issuance has risen in line with the overall increased activity in debt capital markets. Sukuk from the GCC region reached a five- year high at an estimated US$37.6bn in 2007, accounting for about 60% of the global sukuk market. As a result of the finan- cial crisis and the subsequent downturn in the global econ- omy, debt security issuance from the GCC fell to an estimated US$22.5bn last year, a reduction of almost 40% from 2007. Historically, the UAE has been the main issuer of both sukuk and conventional bonds within the GCC, repre- sented about half of total debt issuance in both 2007 and 2008 from the GCC. The UAE was followed by Saudi Ara- bia, which accounted for about 23% and 12% of total GCC debt issuance in 2007 and 2008, respectively. Despite the ongoing financial crisis, sukuk issues rough- ly maintained their proportional levels relative to total debt issues within the GCC in 2008. Sukuk issuance represent- ed about half of total debt issuance from the GCC in 2007, and about 40% of total debt issuance from the GCC in 2008. Issues from the UAE in 2008 represented around 60% of GCC corporate sukuk, followed by issues from Saudi Arabia, which accounted for about 24% of GCC corporate sukuk. Based on announcements with respect to prospective issues, an estimated US$25bn of GCC sukuk are planned for 2009, with about half expected to continue to origi- nate from the UAE.

A significant amount has been written about the sukuk market both globally and particularly in relation to sukuk originat- ing from the Gulf

Cooperation Council Countries (GCC). By Rizwan Kanji , senior debt capital markets lawyer, andWiz Khayat , an associate,

Norton Rose (Middle East) LLP Dubai.

Aside from the UAE, there are indications that a sig- nificant contribution to sukuk originating from the GCC will come from Saudi Arabia, which on the sovereign level has announced a number of key infrastructure and development projects in line with its policy of inward domestic investment. The sectors in which Saudi Arabia plans to deploy capital over the next five years include oil and gas infrastructure, general infrastructure, petro- chemicals and electricity and water projects. The current population demographics of Saudi Arabia are significant in supporting strong growth in the domes- tic consumer market. It is estimated that 79% of Saudi Ara- bia's population is under the age of 35, providing potential for greater demand for property mortgages, auto loans and general personal borrowing. It is expected that retail lenders will inevitably need to tap the international cap- ital markets to meet potential increased demand for retail borrowing. The growth of the domestic market should also encourage the expansion of business interests that may require access to debt capital markets to help finance them. An additional recent development in Saudi Arabia is a pro- posed law that would permit the granting of mortgages. With the lifting of limitations on mortgages, the true underlying value of real estate assets in Saudi Arabia could be tapped for the benefit of both retail and commercial sec- tors. The establishment of a mortgage industry would be significant for property developers and the financial sector in Saudi Arabia and would be likely to lead to the need for constant debt-raising to support such growth. The proposal to implement such a mortgage law is believed to be in advanced stages of consideration by Saudi authorities.

Recent key considerations in structuring sukuk Further to the discussion on trends in sukuk issuance from the GCC, it may be helpful to briefly discuss recent key issues in relation to structuring sukuk generally and in Saudi Arabia.

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