The UAE Ministry of Finance (MoF) has collaborated with the Central Bank of the UAE (CBUAE) – the issuing and paying agent – to disclose the outcome of the inaugural auction of the Islamic Treasury Sukuk (T-Sukuk) denominated in dirhams. The benchmark auction size was AED1.1 billion, and it is a component of the T-Sukuk issuance program for 2023.
The launch of the UAE T-Sukuk program, valued at AED1.1 billion, experienced robust interest from its eight primary bank dealers, resulting in bids totaling AED8.3 billion and an oversubscription rate of 7.6 times. The high demand was evident in both tranches, culminating in a final apportionment of AED550 million for the two-year tranche and AED550 million for the three-year tranche, resulting in a total issuance of AED1.1 billion.
The Sukuk will be issued initially in 2/3/5 year tenures; followed by a 10-year tenor at a later date.
Commenting on this, H.H. Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum, the First Deputy Ruler of Dubai and the Deputy Prime Minister and Minister of Finance of the UAE, expressed that the prosperous commencement of the T-Sukuk auction demonstrates the UAE’s prudent strategies for investment and goals. He further noted that the UAE continues to consolidate its stance as a worldwide investment hub and one of the most progressive and competitive economies globally, particularly in the Islamic economy sector.
Sheikh Maktoum stated that the issuance of T-Sukuk will provide exceptional Islamic assets at competitive rates, as a result of the expanding investor base. This development, he added, would have a beneficial impact on the country’s economy and investment climate.
Read more: Boosting Islamic economy: UAE issuing AED1.1 bn T-Sukuk
Secondary market trading
For his part, Vijay Valecha, Chief Investment Officer, Century Financial, said: “This auction will follow a secondary market listing on Nasdaq Dubai to promote secondary market trading. The first-of-its-kind dirham-denominated Islamic T-Sukuk will likely give rise to more such issuances domestically and across the GCC countries.”
He added: “For starters, the T-Sukuks are like US treasury notes and bonds, with the end risk assumed by the federal government. The issuance will also look to serve as a critical reference pricing for other prospective dirham-denominated issuances. The UAE debt market is currently in its nascent stages. Looking at the current bond market statistics, there are 27 dirham-denominated bonds in circulation currently, with a combined outstanding amount of AED 42 bill ion ($ 11.4 billion). Compare this with Saudi Arabia, whose Saudi Riyal-denominated bonds outstanding amount of SAR 178 billion ($ 48 billion) outnumbers total dirham-denominated issuance by 4x. While Saudi Arabia’s economic size is 2.7 times that of UAE, UAE still has much room to catch up. This new UAE issuance will likely be a bellwether for the nation’s debt market. Last year, the UAE government launched dirham-denominated treasury bonds to deepen its Debt Capital Markets (DCM) further. Looking at the corporate funding pattern in the GCC region, a majority of the issuances are skewed towards the financials and banks’ side. Issuing new local currency debt products will only promote more risk-taking and allocation by non-bank entities.”
Furthermore, Valecha noted the average coupon rate of 3.83 % across both the 2-year and 3-year tranches is higher than the current coupon rate offered by equivalent duration US Treasury Notes. The average coupon rate on an equivalent US Treasury Note/Bond yield is 2.435 %. Such lucrative pricing bodes well for the local investment space over here.
“In the current high-interest rate era, many investors are hunting for high yields over a short-term duration. Once these two and three-year sukuk start trading over secondary markets, they could likely find more traction amongst institutional and retail investors.”
Click here for more news on banking & finance.