IsDB raises USD 1.5 bn as sukuk market shakes off war premium

Investor demand gave the Islamic Development Bank room to tighten pricing on its latest USD sukuk, with orders topping USD 2.75 bn before the bank settled on a USD 1.5 bn raise, it said in a press release. The five-year certificates priced at 48 bps over SOFR mid-swap, 2 bps tighter than initial guidance, and carry a 4.781% yield. The orderbook also beat the USD 2.65 bn peak for IsDB’s first benchmark of the year in May.

The book skewed official. Central banks and official institutions took 51%, banks and private banks 38%, and asset managers 12%. Geographically, 39% went to the Middle East and Africa, 36% to the UK and Europe, 13% to Asia, and 12% offshore US. Proceeds will fund projects across IsDB member countries.

The issuance lands in a market that has largely shaken off the war premium. Yield spreads on Saudi bonds and sukuk have almost returned to pre-conflict levels, roughly where they sat last January, Bashar Al-Natoor, Global Head of Islamic Finance at Fitch, told Al Arabiya, a sign geopolitical risk is fading from Gulf pricing. Tightening further, he cautioned, would need risk to ease more still, “a scenario that does not seem very likely at the moment,” which makes stability at pre-war levels the realistic read.

A widening funding gap is the structural driver. Saudi and Gulf banks will keep tapping debt markets, particularly in USD, as lending outpaces deposit growth, Al-Natoor said. “The growth of deposits no longer keeps pace with the growth of loans, creating a funding gap that banks need to cover through the issuance of sukuk and bonds,” a dynamic that runs across the Gulf and points to sustained issuance ahead.

Why it matters: As long as Gulf currencies stay pegged to the USD, the region’s financing costs are hostage to US monetary policy, with rising Treasury yields lifting the base cost of every new issue. What’s changed is the spread. The return to pre-war levels means IsDB and the Gulf banks behind the coming issuance wave can raise dollars without paying a conflict premium, even as the demand for that funding, driven by loans outrunning deposits, only builds.

ADVISORS- The joint lead managers included a China-heavy roster of Bank of China, China International Capital Corp., and Industrial and Commercial Bank of China, alongside Barclays, Goldman Sachs International, HSBC, BMO Capital Markets, KFH Capital, Natixis and Société Générale acted as joint lead managers.