gif Report on Sukuk
The Sukuk market is the fastest emerging form of Islamic finance, estimated to be increasing at an annual average rate of 40%
spurred by the high levels of surplus savings and reserves in the Middle East and Asia
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Asian Growth Economic growth in developing Asia, includ- ing Malaysia and Indonesia, will accelerate to 9.2 percent this year from 6.9 percent in 2009, while Middle Eastern economies may expand 4.5 percent compared with 2.4 percent, according to estimates by the Inter- national Monetary Fund on July 7. Govern- ments are tapping local and international sukuk markets to help set benchmark rates for corporate bond sales. The debt is typi- cally backed by assets or cash flow because Islamic law bars payment of interest.
Investors earn any profit from the assets in- stead. The extra yield investors demand to hold Dubai’s dollar sukuk rather than Malay- sia’s 3.928 percent Islamic note due June 2015 has narrowed 34 basis points to 417 basis points since May 28, according to data compiled by Bloomberg.
The yield on the Dubai Department of Fi- nance’s 6.396 percent sukuk due in No- vember 2014 rose two basis points to 7.1 percent today, Bloomberg data show. The difference over similar- maturity U.S. Treas- uries has widened 180 basis points to 583 since the debt was sold in October.
Spreads Narrow The spread between the average yield on emerging-market sukuk and the London in- terbank offered rate, has narrowed 60 basis points to 383 since the end of June, accord- ing to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The difference reached this year’s low of 369 on April 15.
The debt returned 9.3 percent this year, ac- cording to the Index, while bonds in develop- ing markets gained 10.8 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows. The average yield on sukuk sold by Gulf borrowers widened 74 basis points to 6.5 percent since a Nov. 18 low, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index.
Dubai World, which is renegotiating terms on $23.5 billion of liabilities, said on July 22 it expects to complete the agreement in “com- ing months.” Property unit Nakheel PJSC, which held a separate meeting with its lend- ers July 14, said a group of creditors repre- senting banks “unanimously supported” a proposal on terms of $10.5 billion of loans and unpaid bills.
16 Global Islamic Finance October 2010
‘Risk Aversion’ “The increased risk aversion and wider spreads have made it a relatively expensive time to borrow,” Khalid Howlader, a Dubai- based senior analyst at Moody’s Investors Service, said in an interview. Issuance in the second half of 2010 will be “not much above where we are now, a couple of issu- ances maybe, but more likely in Asia rather than in the Gulf.”
Malaysia, the world’s biggest market for Islamic bonds, raised $1.25 billion in May from the year’s biggest sovereign sale of Is- lamic debt that complies with Shariah prin- ciples. Twenty-six companies from Malaysia raised 9.6 billion ringgit ($3 billion) from lo- cal currency sukuk sales this year, according to data compiled by Bloomberg.
Policies to promote assets that follow Islam- ic law are spreading beyond nations with a Muslim majority to Europe and Japan. Singa- pore’s government started a S$200 million sukuk issuance program in January 2009, which was set up to help provide financing to banks offering Islamic services, according to the Monetary Authority of Singapore.
Kazakhstan, Thailand State-run Islamic Bank of Thailand plans to raise $155 million by the fourth quar- ter, President Dheerasak Suwannayos told reporters in Bangkok on July 2. Indonesia, with the world’s largest Muslim population, raised $650 million from its first internation- al Islamic dollar bond sale in April last year.
Kazakhstan, the former Soviet republic that last sold international debt in 2000, is planning a debut Islamic bond offering to broaden its investor base, Aibek Bekzhanov, head of Islamic instruments at the Regional Financial Center of Almaty, said July 27.
“Some countries clearly want to develop Is- lamic finance locally,” S&P’s Damak said. “They are also aiming to develop necessary tools, like a yield curve, that private sector is- suers can benchmark themselves against.”
The “revival” of the sukuk market will depend on the “restoration of confidence among financial institutions and renewed interest in asset-backed structures,” said Harald Eggerstedt, head of credit research at RIA Capital Markets Ltd., an Edinburgh-based securities broker and advisory company that
buys corporate bonds from the Persian Gulf including Islamic debt for wealth managers. “Credit uncertainties made many of the yield mark-up levels look insufficient and when li- quidity declined this re- enforced the percep- tion sukuks aren’t good value,” Eggerstedt said in an interview on Aug. 2.
“We will need higher yields and sufficient liquidity for a broader range of investors to come back to the market.”
The global sukuk market was certainly not spared the effect of the global credit crisis and suffered a slowdown in FY2008. How- ever, we saw an overall rebound in FY2009.
I see 2010 as a promising year with several sovereign issues in the pipeline including debuts from several Asian sovereign issues. Further, as the world economy recover, we expect to see a return of the corporate su- kuk market as led by the recent GE and Pet- ronas issuances.
The challenge is to ensure that best practice and governance are being adopted in the structuring of a sukuk and adequate legal framework to support them, especially in jurisdiction that has a young debt capital market.
It is important to dispel concerns raised on inadequate governance and investor protec- tion issues arising from recent high profile sukuk defaults.
The opportunity lies in the shift of appetite from conventional products to Islamic prod- ucts by investors in the aftermath of the glo- bal crisis as the latter is seen to be safer.
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Additional reading:
www.sukuk.me www.zawya.com www.sukuksummit.com www.BusinessWeek.com www.middleeastbusinessforum.com
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