Dubai: Recent trends in sukuk issuance point to increasing number of corporates planning to tap sukuk across key markets such as Malaysia and the Gulf countries.
For the first time since 2007, corporate sukuk issuance rose in 2013 as sovereign issuance declined. As a sign of possibly changing market characteristics, non-sovereign issuance increased by 20 per cent, while sovereign issuance declined sharply by 26 per cent.
Global sukuk market activity across all asset classes largely reflected the trend in Malaysia, which is driven by sovereign and quasi-sovereign debt issuance.
The drivers for sukuk in the coming years in the GCC are likely to be refinancing requirements, the vast government programmes for building infrastructure, and tighter global and local regulation of banks that could dampen their issuance.
“We believe that the demand for sukuk from GCC corporate and infrastructure issuers is likely to continue to grow in the year ahead after posting a solid increase of 17 per cent in 2013 against 24 per cent in 2012 to reach $28.2 billion. Prospects for 2014 largely depend on the direction of interest rates, and to a lesser extent on the relative attractiveness and pricing of other forms of conventional financing compared with sukuk,” said Karim Nassif, Associate Director, Infrastructure Finance Standard & Poor’s Ratings Services.
Analysts say sukuk issuance at historically low rates and long tenors by companies such as Saudi Electricity Co., and Dubai Electricity and Water Authority signal to an increasing depth and maturity of the regional Islamic finance market. These large issuances favour denomination in US dollars to attract international investors, and the Saudi Electricity issue broke a record in tenor with its 30-year maturity, illustrating that the market is broadening and innovating.
Despite the increasing trend in corporate issuances, sovereign issuers will continue to be a major part of the sukuk issuance market. Sovereign and quasi-sovereign sukuk, which accounted for 75 per cent of the total in 2013, were primarily issued in Malaysia.
From a sovereign perspective, sukuk can give governments access to a new investor base by diversifying their sources of fiscal funding. Sukuk issued to foreign investors can also help to cover external financing needs and support reserve building. This is important for countries with sizeable external funding needs, such as those in North Africa. “We believe that for investors looking to buy Islamic bonds outside of traditional markets like Asia and the GCC region, Africa may soon offer a fresh alternative. In recent years, Senegal and South Africa have indicated that they are looking to issue sukuk, while North African countries such as Tunisia, Egypt, and Morocco have finalised or are finalising their legal frameworks to promote sukuk issuance,” said Nassif
Elsewhere in Africa, the small ($62 million) Nigerian sharia-compliant bond issued by Osun state in the southwest of the country in October 2013 may signal the start of a fresh source of sukuk. And Senegal’s plan to issue a $200 million sukuk in the first quarter of 2014 to fund infrastructure projects is drawing on support from the Islamic Development Bank.
The increased involvement of multilateral institutions may further stimulate sukuk activity “We note that multilateral institutions, either Islamic or states with large Muslim populations, are forming a second layer of support and development of the sukuk market above that of domestic initiatives,” said Paul-Henri Pruvost , Associate Director — Financial Services Ratings, Central Eastern Europe – Middle East – Africa at S&P.