Sukuk in High Demand
EghtesadOnline: Demand for fixed-income securities is high among Iranian investors, as decreasing deposit rates leave bonds as the only high yield investment.
Demand outstripped supply 15 to one in Mobarakeh Steel Company’s sale of Murabaha sukuk, Islamic bonds, on Tuesday. The company sold 1 million two-year Murabaha bonds to raise one trillion rials ($28.5 million).
The bonds, which pay 20% interest per annum in quarterly intervals, were sold on the Iran Fara Bourse over-the-counter market.
Commercial lenders have dropped the deposit rates they offer continuously for the past two years. Interest on one-year deposits has dipped from 27% per year two years ago to 16% now. The last drop came a month ago when major lenders shaved two percentage points from deposit rates, in response to pressure from the government and the Central Bank of Iran, reports Financial Tribune.
Declining interest rates come at a time when equity markets are in a bearish slumber with no hope of a change in their fortunes.
Corporate earnings have slumped due to low business investment and near non-existent consumer spending; in other words, an ongoing recession in Iran’s economy.
Stocks on Tehran Stock Exchange rose to a four-week high on Thursday’s market close, 2.3% off a five-month low hit on 21 July.
The absence of even the faintest hope of a rebound in stocks in the short- to mid-term future has multiplied demand for fixed income securities among mutual funds and individual investors. Thus, orders by institutional investors were limited to 50,000 securities, while other investors could not get more than 20,000 sukuks.
Nevertheless, there were 15 trillion rials ($427 million) of buy orders for MSC’s Murabaha sukuk.
To work out who got how many bonds, the ticker for the bonds was closed to bids at 12:00 a.m. Tehran time. The bonds were allocated based on the size of the orders, so it was not a first come, first served sale. The allocation of the bonds to buyers carried on till 08:00 p.m., way after trading hours.
Bond prices cannot fluctuate freely in Iran, so prices cannot adjust based on supply and demand, leading to queues for buying and selling securities.
Murabaha sukuk are certificates of equal value issued for financing the purchase of goods based on Murabaha contract. Sukuk holders become the owners of the underlying goods. These sukuk are typically issued by the seller of the Murabaha goods, while the subscribers are the buyers of those goods.
Funds realized from the sukuk issue are used to purchase the underlying goods. Being the owners of Murabaha goods, sukuk holders are entitled to receive its sale price.
MSC is Iran’s leading steel-producing company with a market share of 47% in 2015. The state-owned company, with an integrated flat steel production capacity of 5.2 million tons of steel sheet products, has announced a program to increase its steelmaking capacity to 25 million tons/year by 2025, from 6 million tons in 2015.
The company is constructing an iron ore concentrate and pellet production plant, each with an annual production capacity of 5 million tons.