Sukuk offering adds to 2015 sales that are down 33%; Union Investment sees Bangladesh sale being oversubscribed

Bloomberg
Kuala Lumpur


Bangladesh is a rare bird among developing nations: it benefits from a weakening Chinese yuan, is intervening to stop its currency gaining and is about to sell a debut Islamic bond in the quietest year for issuance since 2011.
The nation is planning a $1bn note sale that may include a portion of Shariah-compliant notes “anytime soon,” central bank governor Atiur Rahman said in a September 10 interview in London. Only Hong Kong, Malaysia and Indonesia have issued global sukuk in Asia so far in 2015. Bangladesh Bank has sold $3.5bn of taka in the past year, boosting foreign-exchange reserves to a record $27bn, said Rahman.
Bangladesh has been a bright spot among developing economies struggling with a deepening slowdown in China as the devalued yuan cuts the cost of raw materials imports used in its garments industry, the world’s second-largest. Estimated growth of 7% rivals that of China, while foreign-exchange reserves exceed those of Pakistan, whose $1bn November offering of Islamic dollar bonds was five times oversubscribed.
“It will get a very good response,” said Sajjad Anwar, Karachi-based chief investment officer at NBP Fullerton Asset Management Ltd, which oversees 45bn Pakistani rupees ($431mn) and sees Bangladesh paying 5.5% for a five-year sukuk, compared with Pakistan’s 6.75%. “Bangladesh’s economy is in a better position. Their exports are growing and they are getting remittances.”
Bangladesh has only ever sold six-month Shariah-compliant local-currency bills and Islami Bank Bangladesh Ltd is the sole corporate with an outstanding sukuk. The nation is rated the third-highest junk score of BB- by Standard & Poor’s, which reaffirmed its credit assessment in May. That’s three levels higher than Pakistan, whose Islamic dollar notes due in 2019 were paying 6.07% yesterday, down more than 100 basis points from the year’s high in January.
Worldwide Islamic bond sales have dropped 33% in 2015 to $24.1bn from a year earlier, data compiled by Bloomberg show. That’s the least since $20.8bn in the same period of 2011.
While S&P said its Bangladesh ranking reflects a shortage of infrastructure and government services, it noted a “relatively modest external debt burden” at 26% of gross domestic product in 2015.
The nation may set up a sovereign wealth fund this year to attract overseas investment for financing building projects, governor Rahman said in an August interview. The central bank would use its foreign-exchange reserves for the fund, he said. Those holdings compare with Pakistan’s record $18.7bn.
The rising reserves reflect efforts by the monetary authority to keep the currency stable by selling taka and buying dollars. The taka has traded in a range of 77.150 to 78.6750 versus the dollar this year and has strengthened 0.19% in 2015. That compares with declines of 5% and 3.7%, respectively, for the Indian and Pakistani rupees.
“Stability is our number one goal,” Rahman said in the September 10 interview.
Bangladesh’s Shariah-compliant assets account for 17% of the total, according to a May report from the Kuala Lumpur-based Islamic Financial Services Board. That compares with 10.4% in Pakistan, central bank data show. About 90% of the country’s 169mn people are Muslim.
Demand for Bangladesh’s sukuk should be similar to that of Pakistan’s, said Sergey Dergachev, a senior money manager who helps oversee $13bn of emerging-market debt at Union Investment Privatfonds GmbH in Frankfurt.
He said the nation may have to offer a premium of 30 to 40 basis points over Pakistan’s Islamic bonds given it’s a debut issuer and because of the current volatility in financial markets.
“A small sweetener is a good signal,” Dergachev said. “We will definitely take a look at it, and I am curious how the demand and valuation for Bangladesh will look like. I like the credit story.”
Bangladesh’s economy has been supported by demand for its textiles, which the central bank says are produced at a third of the cost of those in China. Garments accounted for more than 80% of its exports and surpassed $18bn in 2014, according to US government data.
Remittances from Bangladeshis working abroad rose to $1.19bn in August from $1.17bn a year earlier, central bank figures show. They totalled $14bn in 2014 and amounted to 8% of GDP, according to the CIA World Factbook.
Bangladesh’s planned offering would add to the range of Shariah-compliant options for Islamic banks as they seek investment avenues for assets the World Bank estimates at $2tn globally.
“Bangladesh will not have a problem raising money through the sukuk,” said Faraz Younus Bandukda, chief executive officer at Fortune Islamic Services (Pvt) Ltd, a Shariah-compliant brokerage in Karachi. “It might be oversubscribed as well. Global financial institutions have huge appetite. They have huge liquidity and avenues are few.”