Bahrain's $750 million sovereign sukuk issue attracted an order book of about $4 billion with strong demand from the Middle East, a lead manager said, giving a promising sign to cash-stripped corporates to tap markets.

Bahrain, the first sovereign to issue a sukuk in the Arab region this year and only the second globally.

The initial size of the sukuk offering was $500 million, but the issue was oversubscribed by almost eight times. As a result, the value of the sukuk was raised to $750 million, a Central Bank of Bahrain statement said.

“One of the major reasons behind this issue was to establish a yield curve benchmark for longer-term Islamic securities,” said Shaikh Salman bin Isa Al Khalifa,  executive director, banking operations, CBB.

“This is a testament to Bahrain’s strong credit and the confidence which International markets place on the kingdom’s financial sector,” added Shaikh Salman.

The sukuk was priced at the low end of expectations at 340 basis points over US Treasuries.

"They've quickly realised when they saw the responses coming through they could increase the issue, the only constraint was in terms of assets," Mohammed Dawood, head of debt capital markets at HSBC Amanah, one of the lead arrangers of the issue, said.

Islamic bonds, or sukuk, are underpinned by physical assets whose returns are used to pay bond-holders, to account for Islam's prohibition of interest.

Some 55 percent of the issue went to Middle Eastern investors, with Europe accounting for 26 percent and Asia for 15 percent of the investor base of almost 200 accounts, Dawood said.

He said there would have been more than enough demand from the Middle East to cover the whole issue. Bond markets in the Gulf Arab region are in an early stage of development and lack the depth and secondary trading of Western conventional bond markets.

"Previous issues would be placed internationally and bid up by local investors who received lower allocations. This Bahraini issue is a departure from that strategy to achieve tighter pricing," said Mohieddine Kronfol, managing director at Dubai-based asset management company Algebra Capital.

The global sukuk markets in 2008 slumped some 56 percent from 2007 to $14.9 billion, according to Standard & Poor's.

The strong demand for the sukuk is likely to encourage corporates eager to return to the market which has been lying idle for months after the global liquidity freeze hit the region late last year.

"That should be a promising sign for corporates to trade off their sovereigns for a premium relative to quality of credit," said Nader al-Salim, a banker at Citigroup's Islamic banking operations.

Saudi Electricity told Reuters on Sunday it plans to issue sukuk that could be worth about 5 billion riyals ($1.33 billion). Saudi Arabia plans to launch on Saturday its new market for both conventional bonds and sukuk to offer firms new sources of funding amid tight credit conditions. -Reuters