Saudi Dairy Firm Almarai Eyes $500m Sukuk Sale

Saudi Arabian dairy producer Almarai Co plans to raise at least $500 million from the sale of a debut international Islamic bond to help to finance ambitious growth plans, a senior executive said on Wednesday.

The company, which is the Gulf’s largest dairy firm, has previously sold two Islamic bonds, or sukuk, in local currency, open only to Saudi institutional investors.

“We’re looking at how to get financing internationally. We’re targeting at least $500 million and this should be out in the next 12 months,” Paul Louis Gay, Almarai’s chief financial officer, told reporters.

The company aims to invest 3 billion riyals ($800 million) annually in the next 5 years, Gay said.

“Proceeds will be used to finance our growth, mainly factories, distribution capabilities and farms.”

Gay said the structure of any eventual issue was still under consideration, but the company could opt for a hybrid sukuk.

Hybrid structures are rare in the region, although two banks in the United Arab Emirates have tested markets with hybrid sukuk since last year. Hybrids are usually accounted for as subordinated debt on a company’s balance sheet, and contain some equity characteristics.

Traditionally, Saudi companies and other entities have relied on bank loans and retained earnings to finance their expansion. But many are now diversifying their financing requirements into bond markets.

Despite a burst of riyal-denominated debt issuance, globally-marketed bonds or sukuk remain rare, and therefore are likely to attract strong investor appetite.

U.S. dollar sukuk issues from Saudi Electricity Co in 2012 and earlier this year were multiple times oversubscribed, although borrowers do have to be prepared to pay a higher profit rate to issue international bonds as well as comply with more stringent disclosure requirements.

Almarai reported a first quarter net profit of 255 million riyals, up 5.4 per cent over the prior-year period, due to increased revenues, particularly in poultry sales.

Shares in Almarai are up about three per cent so far in 2013.