In a statement late last week, the Ministry of Finance stated that it had completed receiving investors' requests for its domestic issuance for the current month under the Saudi government's Sukuk program in riyals, where the volume of issuance was set at a total amount of 500 million riyals.
The ministry explained that the issuances were divided into two tranches, the first amounting to 100 million riyals, so the final size of the tranche is 6.125 billion Saudi riyals for Sukuk maturing in 2028, and the second tranche amounts to 400 million riyals, so the final size of the tranche is 13.515 billion riyals for Sukuk maturing in 2035.
Since July 2018, an auction methodology has been used that the IMF believes will give a degree of flexibility to the pricing mechanisms of new domestic issues.
The July 2018 issue (seventh edition) saw the application of this methodology for the first time with debt instruments in the Kingdom, as Saudi Arabia uses the “Dutch auction” which is the “same” auction that the US Treasury uses when it sells its bonds.
With the help of one of the "Bloomberg" products for auction, the primary dealers were granted a "specific ceiling price" that they could not bid on (the price cap), as the "final pricing" was at or below the same or below the pricing ceiling, and the primary dealers were required to submit subscription requests Of their own as well as of their customers.
This auction mechanism differs from the pricing methodology that was used in the past and revolves around determining a specific pricing range, i.e. a higher limit, a middle and a lower limit, and they are asked to price between this range and then the final price is determined by the issuer.
The Yield curve
The yield curve is defined as a line that determines the interest on debt instruments at a specific time in which the issuer possesses balanced creditworthiness, but it varies in terms of maturity, as there is, for example, an interest difference between Sukuk and bonds for five years and for 30 years.
The yield curve usually takes an upward trend, which is the normal curve, but when it is reversed, it is that the yield on the shorter-term bonds is higher than the yield on their longer-term counterparts.
Saudi Arabia enjoys a natural yield curve, whether with its local or hard currency-denominated issuances and since 2019 it has succeeded in extending the maturities of Sukuk in the local market through new issues of 12, 15 and 30 years in order to complete the risk-free yield curve, which contributes to supporting various markets, including debt markets real estate.
The same thing was repeated in 2020 when it saw its dollar issuance of maturities of seven years and 12 years and for the first time a bracket of 35 years, all of which came during separate maturities, contributing at the same time to prolonging the period of those maturities in accordance with the state's public debt management policy.
Individual participation
The issuance of the current month is expected to boost the stock of savings bonds available for individual investments in the secondary market.
The decision to activate the reduction of the face value of the listed government Sukuk to be accessible to individuals, starting in June 2019, means that Saudi Arabia has opened the way for its citizens to participate in supporting development projects in the country, in a progressive step in line with many countries around the world that follow this approach.
The economic reforms that spread over fixed income markets in the Kingdom contributed to making the issue of individuals investing in Sukuk possible after reducing the face value of the Sukuk to one thousand riyals compared to one million riyals previously.
*Economic Reports Unit
