Moody’s rating gives Sharjah sukuk an edge

Sharjah is offering investors an enticement that fellow emirate Dubai doesn’t as the sheikhdom gears up for its first Shariah-compliant bond sale this month: a credit rating.

The emirate, which is more than twice the size of New York City, may price the debt to yield 2.5 percent to 3 percent if it’s a five-year issue, according to three fixed-income analysts surveyed by Bloomberg. That compares with a yield of about 2.66 percent on non-Islamic notes due 2019 for Dubai, which doesn’t carry a rating.

Sharjah’s A3 rating at Moody’s Investors Service, a grade four levels above junk, widens the pool of investors who can buy the debt, according to Samer Mardini at SJS Markets Ltd. Moody’s cited the emirate’s “strong” fiscal and government-debt position, which may appeal to some money managers in Asia and Europe whose fund rules prevent them from holding non-rated or below-investment-grade debt.

“Even though Sharjah’s economy is smaller and it’s a new borrower, its credit rating gives it an edge,” Mardini, the Dubai-based vice president of fixed income at SJS Markets, said by telephone on Sept. 2. “There’s a lot of liquidity in the market, and investors are clamoring for more sukuk, especially stable government debt like Sharjah’s.”

The issue will probably price to yield from 2.5 percent to 2.8 percent, Mardini said.

Sharjah, the only one of the United Arab Emirates’ seven sheikhdoms to ban alcohol, hired HSBC Holdings Plc, KFH Investment, National Bank of Abu Dhabi PJSC, Sharjah Islamic Bank and Standard Chartered Plc to arrange meetings starting this week.

The government’s “prudent management of the public finances gives businesses and investors the confidence to settle in the emirate and create long-term value,” Sharjah’s media department said in an e-mailed response to questions yesterday, citing a statement from the Finance Department. “We have a strongly growing, resilient economy based on a thriving private sector and our longstanding manufacturing strength.”

The sheikhdom’s 101 billion-dirham ($27.5 billion) economy is less than a third of neighboring Dubai’s. While Sharjah’s debt-to-gross domestic product was about 7 percent in 2013, the ratio may rise to 10.5 percent at the end of 2015, according to Moody’s estimates in July. Dubai’s ratio was about 60 percent last year, International Monetary Fund data show.

Sharjah’s sukuk will build on the “efforts of the government to achieve modern and professional financial management, in line with international best practice,” Tom Koczwara, director of the emirate’s Debt Management Office, said by e-mail yesterday.

Unlike Dubai, whose popularity outshines the other emirates in the U.A.E., Sharjah isn’t as well known among people Sergey Dergachev describes as “tourist investors.”

“I can imagine that many tourist investors don’t know a lot about Sharjah, and investor education is valuable,” Dergachev, who helps oversee $10 billion in emerging-market debt at Union Investment Privatfonds GmbH in Frankfurt, said by e-mail Sept. 1. “My guess is that approximately 90 to 95 percent of the issue will go to investors who are very well familiar with Sharjah’s credit story.”

Dergachev estimates the sukuk will price in the area of 2.8 and 2.9 percent.

The emirate will meet investors in the U.A.E., Saudi Arabia, Singapore, Malaysia and the U.K., and will sell a sukuk subject to market conditions, according to Sharjah’s Koczwara.

“It’s the first high-grade sovereign issue in a long time,” Danny Reynolds, a Dubai-based associate director at Exotix Partners LLP, said by telephone yesterday. “The market has been crying out for it, so there’s going to be a lot of demand for it. While the sukuk may price around 3 percent, I wouldn’t be surprised if they compressed it to about 2.8 percent.”-Bloomberg