There is a backup plan! At the end of an article from Reuters about the proposed $500 million, international (Reg S) sukuk from Airline Garuda Indonesia is the backup plan if the sukuk does not get issued. This is important because there has been rising volatility in markets since the oil prices came crashing down and Garuda’s sukuk is being used to refinance debt, making it important for the airline to get issued (and important also since it is the first Indonesian corporate sukuk). If the carrier, which made a small profit in the first quarter after a much larger loss a year earlier, is unable to get the sukuk off the ground within 9 months, it plans to renegotiate a bridging loan to become a term loan.
The bridging loan came from its global co-ordinating bank, National Bank of Abu Dhabi, and its joint structuring bank Dubai Islamic who will lead 13 other banks in arranging investor meetings which will be in Asia, the Middle East and Europe. The choice of leads on the sukuk is not surprising since the biggest international market for sukuk is in the Middle East (after neighboring Malaysia) and both NBAD and DIB are in the top 10 lead arrangers this year and both were involved in similar roles on the UKEF-guaranteed Emirates sukuk. The shift towards Middle Eastern financial markets would also mirror the shift in flights which powered the return to profit: despite expanding capacity only 1%, Garuda shifted more of it to the Middle East and China and was rewarded with a 17% increase in passenger traffic.
Oman’s debut sukuk presents a significant opportunity to expand the Islamic capital markets in the country given the projected RO 2.5 billion deficit and assets held either in cash or interbank wakala at just the two standalone Islamic banks accounts for RO 95.9 million out of their RO 423.7 million in combined assets. Adding in the Islamic banking services of the conventional banks and this total likely grows significantly.
However, to just limit the opportunity from the Islamic banks in Oman would be to sell it short because the government has an investment-grade rating (A1 from Moody’s), has a USD-linked currency and is part of the GCC and thus familiar to many regional investors. This, combined with the relative rareness of Omani or other GCC sovereign sukuk, could make it a popular credit for regional investors. The sukuk structure is familiar to and accepted by regional investors and it would open the full spectrum of possible investors both Islamic and conventional.
Even if oil prices stabilize, the deficit is not likely to shrink into single digits without significant budget consolidation (a recent IMF Article IV estimated that the debt could rise to 25% by 2020 (or 70% if the fiscal buffers are preserved). While this may threaten the A1 credit rating, it might still remain investment grade because of its low net debt position. For the capital markets in Oman, it could be a big opportunity and also an opportunity to demonstrate to other GCC sovereigns a path to build a sovereign yield curve.