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Last year was supposed to represent the pivotal moment in which sukuk debt – Islamic versions of bonds – came into their own as a deep, mature and liquid source of funding.
Issuance data from January suggest the jury is still out.
First, the case for.
Last year saw a record $144bn of sukuk issuance, according to Islamic Finance Information Service (Ifis). More than that, the market featured renewed reach, strength and innovation: sovereign issues came from ever further afield, notably Turkey; headline deals were bigger than ever before, particularly Qatar’s record $4bn issuance; corporate issuance was not only widespread but innovative, such as Axiata’s dim sum offshore Rmb sukuk; and it was notable that the first Basel III-compliant tier one instrument from a Middle Eastern bank came not in conventional but Islamic form, with a $1bn tier one perpetual from Abu Dhabi Islamic Bank in November.
Better still, most of these deals sold substantially not just to Islamic but conventional investors, attracted by the yield, diversification and risk profile (all sukuk must be underpinned by tangible assets).
“Historically, this has been a vanilla, five-to-seven-year market, typically characterised by senior transactions,” says Mohammed Dawood, global head of sukuk financing at HSBC, which was a bookrunner on the ADIB and Turkey transactions, among others. “But over the last year we’ve seen signs the market is moving with the times, adapting and showing innovation.” Moreover, he says, deals like ADIB’s have enjoyed enormous popularity – a $15bn order book, in that instance – and performed well in the aftermarket.
Second, the case against.
According to Ifis analyst Mahinaz El Aasser, issuance in January, at $12.64bn, was down 38 per cent on January 2012, although it was well up on December. Also, it remained utterly dominated by domestic transactions, and in particular Malaysia’s, by far the most sophisticated sukuk market in the world – which is interesting, and useful for Malaysians, but not necessarily a sign of a maturing market.
El Aasser says that 90 per cent of January’s issuance was Malaysian, “higher than usual.” Other key deals in January were also domestic, notably a debut SR1.5bn issue from Savola Group from Saudi Arabia. And there are still mixed reports about liquidity, both in domestic and cross-border markets: with deals selling so very fast amid heavy over-subscription, there is so much buy-and-hold behaviour that sukuks don’t trade with anything like the volume common in conventional markets.
Still, there are signs of cross-border deals cranking up; Malaysia’s Sime Dary and the Dubai government both brought international deals in late January.
And Dawood believes the Dubai deal in particular, in which the government raised $750m in 10-year funds after its borrowing costs fell by 40 per cent in a year, is illustrative of the deals that will characterize 2013. He expects a record year for global sukuk issuance, with the Gulf Cooperation Council nations alone issuing as much as $35bn between them to take advantage of low funding costs.
“The events of the last year have created their own momentum,” he says. “Issuers who last year were neutral or dismissive towards Islamic instruments are now willing to issue.”
