Sharjah Plans Debut Sukuk -Bankers

The emirate of Sharjah is planning its first foray into international bond markets with a debut sukuk deal, three bankers with knowledge of the matter said.

The sovereign is rumoured to have appointed banks to manage the transaction and could launch the deal as early as September, the bankers said.

While Sharjah itself has not issued a bond in international markets before, state-owned Sharjah Islamic Bank has two sukuk outstanding: a $400 million, 4.715 per cent 2016 bond and a $500 million, 2.95 per cent 2018 note.

Sharjah would become the fourth emirate from the United Arab Emirates to issue bonds. Apart from heavyweights Abu Dhabi and Dubai, Ras Al Khaimah (NR/A/A) has three sukuk notes outstanding and is probably the closest comparable issuer, bankers said.

“There are similarities: they are both part of the UAE federation, they are both rated similarly and ratings agencies derive a lot of comfort from the support from the federation and Abu Dhabi in particular,” one Dubai-based debt capital markets banker said.

Both emirates have received development grants from the Abu Dhabi authorities for infrastructure projects, such as the development of the road network.

“Sharjah is a more diversified economy than RAK, it has been around for longer and its contribution to the federation is higher. As a debut issuer, it also offers some diversity,” the banker said.

Having said that, investors may not see value in the notes if they price too far inside RAK; a key part of the proposition is the implicit support from Abu Dhabi, which both emirates enjoy, he said.

RAK’s 3.297 per cent 2018 sukuk note was trading at a cash price of 103.575 on Tuesday at mid-morning, translating to a yield of 2.412 per cent and a Z-spread of 85.3 basis points, according to Tradeweb data.

Sharjah is rated A3 by Moody’s and A by Standard & Poor’s. Both agencies believe the emirate has a stable outlook.

In its first report on Sharjah published in May, Moody’s said the A3 rating was based on the emirate’s very strong fiscal and government debt position and the diversity of its economy.

“Aided by a competitive manufacturing sector, Sharjah’s credit strength is also supported by the relatively higher degree of economic diversification, compared to the rest of the UAE and countries in the GCC (Gulf Cooperation Council),” Moody’s said in the report.

Also, the UAE Ministry of Finance funds a large portion of public services for UAE nationals directly from its own budget, including defence and a basic level of education and healthcare. This spending is then supplemented by the Sharjah government.

One weakness is that given the small size of the emirate’s economy and its linkages with the rest of the UAE, Sharjah is exposed to macroeconomic volatility.

“Institutional weaknesses are also manifested in a low degree of transparency from a statistical system that has limited coverage of economic data,” Moody’s said.