Sukuk market to be in line with 2009 performance

The Islamic bond (sukuk) market is expected to continue recovery this year following the post-Dubai World recovery and a resolution of the conglomerate's debt standstill with its creditors, Moody's Investors Service said yesterday in a study.

"We believe a potential transparent and mutually satisfactory settlement to Dubai World's multi-billion dollar debt may calm investor fears and help other issuers to tap the market regionally. This, together with the various legislative and other developments globally, could lead to sukuk issuance in 2010 being in line with 2009 issuance or slightly better. Nevertheless, we continue to predict that most issuance will more likely take place in the second half of 2010, when investors' appetite for risk-taking, global signs of recovery and better corporate performance may be more apparent," said Faisal Hijazi, Business Development Manager for Rating Services and Islamic Finance, at Moody's Investors Service.

The study anticipated that the majority of first half sukuk issuance will come from supranational, sovereign and government-related issuers.

The recent improvements in government financing metrics and credit qualities are likely to prompt governments and, to a great extent, government-related issuers (GRIs) to tap the sukuk and conventional bond markets for further debt issuance, as it is believed that these entities would be most able to raise new funding through issuing fixed income securities, especially for longer-term tenors.

"We could also potentially see an influx of international investments from overseas investors, as the world continues to struggle with both a weak global recovery and a sovereign debt crisis in other jurisdictions, mainly in Europe. Significantly, all GCC governments have an abundance of debt capacity, with all six countries having a ratio of government debt to GDP below 25 per cent , with Bahrain the highest at 22 per cent . There are early indications that this trend is already taking place, with Saudi Arabia, Abu Dhabi and Bahrain planning further issuances through central governments or through their GRIs.

The study, however, warned that considerable uncertainty continues to surround the potential level of new sukuk from both unsecured and secured issuances, depending on the magnitude of the global recovery and the impact of the resolution of the credit standstill for Dubai World.

"We are actively looking into several asset-backed sukuk and bonds that are currently being structured in the Middle East, mostly in the GCC and specifically in the UAE and Saudi Arabia. In fact, some of the sukuk that Moody's rated during the crisis were backed by assets, including Tamweel Residential ABS CI (1) Limited," the study said.

"We also believe the sukuk market has reasonable potential in other GCC countries, including Kuwait, Qatar and the UAE. These markets, together with Saudi Arabia, still lag behind in terms of sukuk issuance in comparison to their respective stock market size and the needs of many of their relatively sizable Shari'ah-compliant issuer and investor bases.

"For example, Kuwait has recently approved a new Capital Market Law but its sukuk market is still valued at 1.5 per cent of its 2009 GDP (12 per cent if conventional bonds are included), whereas its equity market is equal to nearly 95 per cent of GDP. We expect this disparity in the GCC markets to be corrected gradually over the next few years," Hijazi wrote in study titled "Global Sukuk Issuance Poised for Boost from New Legislative and Regulatory Initiatives."

"We are currently treating the timing of upcoming Sukuk in the GCC with caution, albeit there continuous to be a healthy pipeline of planned/announced Sukuk in the UAE and the GCC, mainly among financial institutions and real estate companies, yet their timing is linked to both investors investment appetite and market perception of credit risk spreads in the region. We saw Qatar Islamic Bank experiencing this last week, in suspending its US dollar issuance over price worries. Nevertheless, we feel optimistic that some of these worries will start to dissipate over the next few months and potentially we can expect a better second half of 2009," Hijazi told Emirates Business.

He said dollar-denominated Islamic bond will dominate markets that are exposed/dependent on international investors and have a relatively small/moderate investor base.

"However, I believe markets with a strong domestic investor base and locally based demand including Saudi Arabia, Malaysia and Indonesia to experience local-denominated Sukuk versus dollar-denominated sukuk."

It anticipated that the most promising markets that have so far underperformed their potential are Saudi Arabia, Kuwait, Qatar and, to a lesser extent, the UAE.

These four GCC countries are considered well placed to issue further sukuk, given their increased stock market size, relative to their GDP – especially in Qatar and Saudi Arabia – as well as their need to diversify sources of funding and their market capacity and appetite to issue sukuk over the next few years.

It said the level of capital market maturity in some emerging/new markets in comparison to global markets indicates a historical shift or focus towards investing in the most familiar instrument, ie equities, with a clear strong representation /investment concentration in markets such as Qatar, Kuwait and Saudi Arabia, relative to the world average.

On the other hand, the lack of a long-term (sukuk) investment culture, instrument availability and the strong stock market performance from 2005 to mid-2008 have prevented fixed-income markets from performing on a par with their stock market performance.

Sukuk only emerged as a widely used Shari'ah-compliant instrument in the past five years. Hence, Moody's believed that new sukuk and bond issuances in the coming years will gradually reduce this gap, introducing some consistency into capital markets in line with the globally observed trend.

"We anticipate that Saudi Arabia, the UAE, Qatar and Kuwait will potentially benefit the most given their planned government and private sector investment plans. Nevertheless, we estimate this to be variable across established sukuk markets, mainly driven by the intense implementation of new legislation and regulatory developments; ongoing disintermediation; growth in fixed income/sukuk as an investment and alternative funding instrument; the active role of institutional and fund managers; improving secondary market accessibility and trading; and experience of a variety of sukuk structure issuances, coupled with the return of global markets to a semblance of normality."

Sukuk Deals this year to surpass 2009's $24bn

Moody's Investors Service, which rates $32.452 billion (Dh119.19bn) worth of sukuk, expects deals in 2010 could top last year's roughly $24 billion.KFH Research Said on Monday that Islamic bond sales should climb 50 per cent to $30bn this year, driven by low interest rates and spending by governments on infrastructure programs aimed at supporting growth.

It expects current year will witness new regulations and legislation being introduced into global sukuk markets, especially in new jurisdictions, following such steps taken in Luxembourg, the UK and Indonesia to facilitate the issuance of Islamic finance securities.

France and Australia could become one of the new jurisdictions to implement similar actions. The UK looks set to be the first European jurisdiction to introduce a sovereign sukuk issuance given the advanced legislations that are soon to be approved by the UK Parliament. Nevertheless, the passing of the legislation into law could make it more likely for corporates to issue sukuk rather than a sovereign issuer, given several corporates' pressing funding needs.

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