General Electric Capital Corp (GECC) became the first US
corporate to launch an Islamic bond after pricing a $500m
benchmark on Thursday. The deal gives a boost to sukuk markets
at a time when issuers around the world are stepping up their
search for diverse funding sources. GECC (AA/A2) priced the
five year benchmark with a three year 3.87% fixed rate coupon
at a spread of 175bp over US Treasuries. On November 10, GECC
sold $1.5bn of five year notes to yield 3.838%, or a spread of
155bp. As a result, the US corporate issuer paid an effective
new issue premium of around 20bp, said a banker on the deal.
Deputy treasurer at GECC, Kitty Yoh said: "We have a huge
commercial interest in the Middle East and this deal is a
reflection of our strengthening business ties in the region
while providing a platform to diversify our funding."
The deal follows a roadshow in the Gulf and Asia with joint
bookrunners Goldman Sachs, Citigroup, Kuwaits Liquidity
House (a subsidiary of Islamic bank Kuwait Finance House) and
National Bank of Abu Dhabi.
Dedicated Islamic investors in the Gulf bought the bulk of the
deal with a modest distribution in Asia, said Yoh. Rumours were
rife that bankers on the Reg S deal released price whispers of
165bp-175bp and attracted $1bn of demand in total. The issuer
and bookrunners declined to comment. "Islamic transactions do
not have the same amount of liquidity as conventional US dollar
deals so this 20bp so-called concession is a reflection of
that," said Yoh. Buoyed by the still competitive pricing of the
debut sukuk, Yoh revealed the GECC will seek to issue another
benchmark Islamic bond next year pending market conditions.
General Electric is the worlds largest corporate issuer
via GE Capital Finance. The borrower has dived into markets
this year to pre-finance upcoming debt maturities. In the
coming years, the borrower will seek to halve its annual global
bond programme from the average $40bn in years preceding the
crisis, said Yoh.
GECC will issue $20bn of global bonds in 2010 and any further
sukuk issues will be counted as separate capital raising
ventures. "We want to maintain different funding platforms
such as sukuk bonds even as we downsize GEs
balance sheet because we think diversification is a wise move,"
said Yoh. In a sign of General Electrics deepening
commercial ties in the region, it signed in July an $8bn
commercial finance joint venture with Mubadala, a state-owned
investment company based in Abu Dhabi.
However in a blow to Islamic bankers, Yoh poured cold water on
suggestions that the borrower will pay up and build a yield
curve with annual sukuk benchmarks. "Whether you see us come to
market with sukuks every year is an open question because this
will depend on investor preferences."
An Islamic finance banker close to the issuer said: "This will
always be a niche market for large US corporate borrowers and
so the pace of further deals will be constrained by pricing and
secondary market liquidity."
Islamic issuance fell by 56% to $14.9bn in 2008 as credit
markets froze up, but, in recent months Gulf sovereign and
state-backed corporates have bombarded the market with
competitively priced Islamic transactions. However, Malaysian
oil company Petronas, which issued a $1.5bn five year sukuk in
August, and GECC remain the only two non-Gulf debut sukuk
issuers of the year.
As is typical of such deals, the bulk of GECCs $500m
sukuk was snapped up by traditional buy-and-hold Islamic
accounts. This might mean that the deal, like its predecessors,
will be blighted by poor secondary market liquidity.
Nevertheless, the $500m paper will serve as a useful benchmark
for other budding US borrowers with a business presence in the
region, said the head of Islamic finance for a US bank in
"This deal will be an interesting case study but if you are an
entity that has no linkages to the Middle East or Asia, sukuks
may not be the right diversification play because Islamic
investors feel more comfortable with businesses they are
GECCs deal may have also helped to kick open the sukuk
market further by broadening the traditional list of assets
eligible to finance an Islamic issue. The sukuk is an Ijarah
structure and will be backed by operating lease receivables of
GEs aviation leasing business.
Ijarah structures are typically backed by land parcels. GE owns
around 1,500 aircraft, leased to global airlines, with average
lease terms of seven years. Islamic bonds are typically in five
year format as this is the sweet spot for local investors. Yoh
said the borrower has already identified a large pool of assets
suitable for backing up a further benchmark sukuk issue in