Portfolios: GCC Sukuk Attractive Amid Rising Rates Prospects

While the ongoing conflict in the Middle East raises concern over the outlook for the sukuk market, the Islamic equivalent of bonds, portfolio managers remain positive both on fundamentals and technicals for sukuk, which also offer a potentially attractive alternative amid prospects of rising interest rates.

Issuers from the Gulf Cooperation Council emerge as the most popular.

As the Federal Reserve prepares to exit its zero interest rate policy, but with the "new normal" promising a still low-rate environment that could continue to starve investment managers for yield for some time, sukuk are considered as an attractive option for those whose mandate allows to test new boundaries.

At Franklin Templeton Investments, Mohieddine Kronfol, chief investment officer of Global Sukuk and MENA fixed income, told MNI that "the lower duration and persistent strong demand from Islamic financial institutions should continue to support the market and allow it to perform well relative to other fixed income sectors, particularly those that have higher average durations."

In a written commentary, he had also argued that "the volatility of Sukuk has historically been more subdued - something that could prove important in a rising interest-rate environment."

He added in his commentary that, "Sukuk provide exposure to some of the fast-growing and most financially sound economies in the Gulf Cooperation Council."

Similar to conventional bonds, the rising interest rate environment is definitely challenging the sukuk market, acknowledged Lim Say Cheong, Executive Vice President, Head of Investment Banking Group Al Hilal Bank.

"Escalation of interest rates/benchmarks over the next 12 to 18 months is inevitable but issuers will still need to borrow to diversify one's source of funding and investor base," he told MNI.

Besides, rates are unlikely to "go over the roof at a rapid pace."

At Azzad Asset Management, Ihab Salib, the lead portfolio manager for the firm's sukuk fund, the Azzad Wise Capital Fund (WISEX), argued that despite the prospects of rising interest rates, "due to the specifics of the sukuk market and the fact that most of the securities are closely held, one could argue the effects of rising rates may not be as pronounced in the sukuk world."

For mandates allowing portfolio managers to invest in sukuk, the GCC region is particularly in demand.

Konfrol is "constructive" for the sukuk market overall, "with the GCC serving as a strong anchor."

He told MNI that while all GCC countries are attractive, "we believe that the UAE, Saudi Arabia and Qatar present the most opportunities at the moment."

Developments in the Middle East, notably the coalition's bombings in Syria and the potential for a worsening of global geopolitical tensions have, however, put stress on the sukuk market.

Still, Kronfol expects a "very limited" impact overall.

"The unfortunate events in Syria have had very limited impact on financial securities in the region and this is expected to remain the case," he told MNI.

"Highlighting this insulation from regional geopolitical issues is the fact that at the height of the Syrian conflict in 2013, three of the worlds' best performing stock markets were in the GCC, led by the Dubai Financial Market," he argued.

Azzad Asset Management's Salib told MNI he particularly sees value in non-conventional issuers.

"As maiden issuers in the market, they need to price the sukuk generously so as to tempt investors," he commented.

Salib sees "some value in the Dubai complex" despite the spread tightening since the beginning of the year, especially the hospitality and retail sectors.

More generally, from a fundamental standpoint, the GCC, which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, "offers the market the greatest support," he commented.

"Being a low population, hydrocarbon rich region whose governments run fiscal and current account surpluses, the economic backdrop is extremely conducive," said Salib, who also pointed out the solid balance sheets of individual issuers, many of them government owned.

Sukuk are increasingly catching global investors' attention, especially as non-Muslim countries - such as the UK government in June and Luxembourg at the beginning of October, which was the first EMU sovereign to issue in a sukuk structure - are joining the pool of issuers.

Going forward, investors are expecting both demand and supply to increase.

From a portfolio standpoint, GCC and Southeast Asian countries "are often underrepresented in many traditional bond indexes and funds," Franklin Templeton's Kronfol said.

He told MNI that in a global bond portfolio, depending on investors' objectives and risk tolerance, "a single digit percent allocation may be reasonable, complemented by improving emerging market allocations in South East Asia and an increasing selection of credits that are diversified by geography, sector and capital structure."

When surveying opportunities within the sukuk market, "broadly speaking, we envisage the primary sukuk supply pipelines as still very much originating from sovereigns - we may see one or two new names from Africa - government-related entities (GREs) and corporates," said Al Hilal Bank's Lim.

"We may still witness a selective range of issuers from the GCC," he predicted.

"From the GRE and corporate perspectives, it may encompass the transport, property development, construction, and utilities," he added.

Lim cited a range of factors supporting demand.

"From the buyer and investor perspectives, the abundance of liquidity resulting from, among others, upcoming maturities, heavy redemption profiles across loans, bonds and sukuk originating from 5 years ago across the GCC/MENA regions, certain geopolitical tensions that have encouraged further inflow of funds seeking relative safe havens, new investment homes, as well as declining loan-to-deposit ratios of local and regional banks - as opposed to 4-5 years ago - creates a stronger momentum among investors as they continue to search for new investment opportunities," he told MNI.

So clearly, new supply would be welcomed and likely absorbed.

In fact, Salib stressed the lack of issuance altogether.

"Compared to our colleagues in the conventional bond market, sukuk issuance is understandably much lower, and with issues such as the recent Indonesian sukuk issue being in the region of 8 times oversubscribed, this is another challenge managers face when constructing a portfolio," he said.

He said it is estimated that Islamic financial assets globally are expected to exceed $2 trillion by 2016.

"The Islamic finance industry is expected to continue growing at nearly 20% per year, and the pool of investors interested in Shariah-compliant securities is expected to rise along with it," Kronfol said in his Beyond Bulls & Bears commentary titled "Sukuk: An Asset Class Goes Mainstream."

Citing research from Kuwait Finance House, Kronfol said the sukuk market topped US$269.4 billion at the end of 2013.

Zooming in to the sovereign sector, Moody's estimated in a September report that sovereign sukuk issuance would rise by $30 billion by the end of this year to $115 billion, with both Islamic and non-Islamic governments tapping the market.

"Moreover, we expect demand and liquidity in the market will improve as the sector attracts more global investors," the rating agency said.

The arrival of major non-Islamic countries this year - the UK, Hong Kong, South Africa, Luxembourg - indicates "a significant change in the potential size, depth and liquidity of this market," it added.

By Moody's estimate, the total sovereign outstanding accounted for 36% of the $296 billion outstanding sukuk as of July 2014.

"Demand from global investors will grow as they become more comfortable with this asset class and it will support their search for yield and portfolio diversification," Moody's also predicted.

On the issuer's side, Al Hilal Bank's Lim pointed out the increasing level of sophistication in the market, citing senior secured and amortizing Sukuk-type transactions and perpetual/hybrid capital type Sukuk instruments issued or structured by "pure corporates" in addition to the more traditional financial institutions.

In fact, his own institution, Al Hilal Bank, issued "the first of its kind Basel III language-compliant Tier 1 Sukuk" that was largely oversubscribed.

Azzad Asset Management, for its part, hopes "to be given a green light soon to use profit rate swaps which swap a set of fixed profit rate cash flows into floating rate cash flows."

"We are also looking to introduce a whole new asset class into the fund in the not so distant future," Salib said.

While issuers and the investor base are diversifying, maturities are increasing, Lim noted, from the 5-year "sweet spot" to 7- to 10-year or even 15-year instruments.

(Deutsche Borse Group / 14 October 2014)

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GCC Islamic finance prospects bright

The GCC Islamic finance industry is expected to maintain its rapid growth over the coming years despite mixed results across the sectors in 2014, according to Standard & Poor’s Ratings Services (S&P).

The industry’s expansion is expected to be driven by the GCC’s robust economic prospects, continued infrastructure needs and rising issuance from governments and government-related entities.

S&P managing director and regional head (Middle East) Stuart Anderson (pictured) said, “We remain upbeat on the outlook for the GCC Islamic finance industry, but we have seen mixed fortunes across sectors this year and a broad spectrum of structural issues continuing to pose challenges. Despite growth, the industry remains a demand-driven market, with limited supply. The expansion and enhancement of existing Islamic finance centres in the GCC, and a more transparent regulatory environment are critical to accelerate growth.

“S&P’s 3rd Annual Islamic Finance Conference in Dubai this week will discuss the outlook for the industry with a focus on the role of regulation in facilitating its development.”

Prospects for the sukuk sector will be one of the event’s key themes. The sector has registered healthy volumes in 2014 with $20.3bn worth of issuances in the GCC (as of October 5); 27.3% higher than the same period last year.

The fall in the issuance of corporate and infrastructure sukuk by almost a third compared to the same period in 2013 was more than compensated by higher issuance from governments and financial institutions. S&P believes the sukuk issuance in 2014 is on course for a 5% growth from last year. Refinancing needs from maturing sukuk and the good economic prospects for the GCC underpin our expectations.

Meanwhile, GCC Islamic banks have continued to increase their market share in the region. Although S&P expects the growth of Islamic banks to gradually converge with that of their conventional peers over the next decade, the market share of Islamic banks will continue to rise in the next few years. S&P expects total GCC (Gulf Co-operation Council) banking assets - both conventional and Islamic - to rise to $2tn by end-2015 from $1.7tn in 2013. In contrast to the Islamic banking sector, the takaful sector in the GCC underperformed their conventional peers. Continued resistance to the concept of insurance has left the market dominated by compulsory lines of business and weakened by fierce price competition.

S&P estimates the GCC takaful sector to generate just over 10% of total market premiums. The sector is dominated by medical and motor insurance, while the provision of life savings products, the mainstay of mature markets, is still undeveloped in the region.

Current and expected trends in Islamic finance, especially the increasing role of regulation in shaping market development will be key themes of the conference in Dubai on Tuesday.

The role of regulation in market development will be a major focus of the S&P event. The ratings agency believes that the Islamic Financial Services Board’s (IFSB) revised capital adequacy standard could give the industry an opportunity to resolve some of its long standing structural weaknesses.

(Gulf Times / 12 October 2014)

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GCC gross takaful contribution seen reaching $8.9bn in 2014

GCC gross takaful contribution is estimated to reach around $8.9bn in 2014 from an estimated $7.9bn in 2013, according to EY’s latest report, ‘Global takaful insights 2014’.

The report forecasts a continued double-digit growth momentum in the global takaful market of approximately 14% from 2013 to 2016 and expects the industry to reach $20bn by 2017. This is against a backdrop of continued buoyancy in the estimated $2tn global Islamic finance markets.

The Gulf Co-operation Council (GCC) countries and Association of Southeast Asian Nations (Asean) markets are likely to maintain their current growth path in the next five years, subject to their economic growth.

The global takaful industry continues to gain market share across several high-value, rapid-growth markets, which still show significant untapped potential. Within the Gulf region, Saudi Arabia accounts for the majority of the total gross takaful contribution at 77%, followed by UAE, which accounts for 15%. The rest of the Gulf countries account for just 8% of gross takaful contributions, the report said.

Saudi Arabia will likely remain the core market of Islamic insurance business, commanding approximately half (48%) of the global contributions, while UAE, Qatar and more recently, Oman, continue to set the pace for the development of takaful products in the Middle East and West Asian markets.

Turkey and Oman are new entrants to the takaful industry, offering strong first mover advantage to takaful operators, whereas established takaful markets in Africa like Sudan, offer great prospects for efficient replication across new African markets endorsing Islamic finance.

Abid Shakeel, senior director, EY’s Global Islamic Banking Centre said, “The continued strong growth of the much larger Islamic banking sector will help sustain the progress of the takaful industry. The rapid-growth markets, particularly UAE, Malaysia and Indonesia, are key markets to watch as they improve on market practices, widen distribution channels and strengthen the regulatory front. The low insurance penetration rates, on average just 2%, across key Muslim rapid-growth markets signify a huge opportunity and growth potential for takaful products, particularly in the areas of family takaful and medical insurance.”

Given the strong underlying market opportunities, a competitive market environment and strategic regulatory reforms, it is vital that the takaful industry addresses key challenges to achieve a sustainable takaful ecosystem.

Among the GCC countries, competition, operational issues and the lack of qualified talent continue to be impediments. Profitability of takaful companies has been threatened not just by undifferentiated strategies but also by the lack of uniform regulations that will allow them to operate across different models. Undifferentiated business strategies mean most takaful operators are competing intensely and this is likely to squeeze out the under-performers.

With strong competition from conventional incumbents, takaful operators are likely to continue their struggle in the medium term, although some will look at alternative customer segments and explore merger options. In striving for scale and profitability, operators are looking at structural transformation around risk, pricing and cost efficiencies.

The industry needs to re-examine its strategies, operations and regulations in order to gear itself up for further growth and a sustainable ecosystem. Success needs to be measured in profit, not market share and those who continue to do what they’ve been doing in the past will struggle with profitability, the report said.

Sukuk issuance likely to rise over next few years: S&P

Corporate and infrastructure sukuk issuance is likely to rise over the next few years, despite the dip in issues over the past eight months compared to the same period of 2013, Standard & Poor’s Ratings Services has said in a report.

In its report “Why corporate and infrastructure sukuk issuance is declining, despite healthy prospects” S&P said issuance has trended downward this year in the Gulf Co-operation Council (GCC) region and Malaysia, dropping 33% and 7%, respectively.

By contrast, total sukuk issuance (including financial institutions and sovereigns) grew by 19% in the GCC and by 6% in Malaysia over the same period.

“We attribute the decline in corporate and infrastructure sukuk in large part to cheap and ample bank liquidity, which has made issuers less reliant on the capital markets,” said S&P’s credit analyst Karim Nassif. “The overall small pool of sukuk issuers, and seasonal factors such as the early Ramadan this year, have also played a role.

“We nevertheless believe corporate and infrastructure sukuk issuance will increase again over the next few years as companies’ refinancing needs grow and as entities establish themselves as sukuk issuers.”

The report says corporate and infrastructure issuance is likely to remain more volatile and difficult to predict than total sukuk issuance. It will likely remain largely a function of the specific needs of the corporate and infrastructure entities that comprise the pool of sukuk issuers in the GCC and Malaysia.

Continued high levels of bank liquidity and uncertainty among investors about compliance standards continue to hold back growth of the corporate and infrastructure sukuk market, the report said.

“The creation of local or regional institutional investment frameworks-for example, to enable pension or insurance funds to invest in sukuk-would go some way, we believe, toward creating a deeper and more liquid sukuk market,” Nassif added.

(Gulf Times / 09 September / 2014)

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Gulf sovereigns continue to dominate dollar sukuk issuance

Dubai: Volumes of sovereign sukuk have increased significantly over the last three years as governments in Asia, the Gulf Cooperation Council (GCC), Europe and now Africa seek to tap increased demand for Sharia-compliant financial assets, however a large portion of these issuance is denominated in local currencies, according to Moody’s.

In the medium term, these international issuances will remain driven by sovereign and government-related issuers from the GCC countries because of their US dollar currency pegs.

Despite recent growth in cross-border sukuk issuance, most sovereign sukuk are issued in local currencies for domestic investors. Of the $105 billion (Dh385 billion) sovereign sukuk outstanding at July 2014, approximately $20 billion are foreign-currency, cross-border instruments of which are almost all denominated in US dollars.

“As global investors becoming increasingly at ease with Islamic instruments, we expect more issuance of cross-border instruments from other jurisdictions such as Indonesia, Malaysia and Turkey to tap this demand,” said Khalid Howladar, Moody’s Global Head for Islamic Finance.

Governments and government related entities (GREs) from the GCC region are expected to be a major supply source for sukuks this year.

According to Moody’s estimates global sukuk issuance this year will exceed the 2013 level to reach around $70 billion, with sovereign issuance increasing to around $30 billion this year. The share of sovereign sukuk in global sukuk markets is larger than in conventional bond markets. The amount of international debt securities reached close to $22.8 trillion in 2013, 7 per cent of which was issued by governments. In comparison, the amount of international sukuk outstanding at the same year-end 2013 was $65 billion, 29 per cent of which was issued by governments.

“The entrance of new issuers will support growth in sovereign sukuk, and increasing volumes — particularly from those of high credit quality governments — will help attract new investors to the sector and provide additional depth and liquidity to the sukuk markets,” said Christian De Guzman, a Moody’s Vice President and Senior Analyst.

In Saudi Arabia Quasi sovereign issuers drive strong domestic market growth. Corporations in Saudi Arabia issued a record 39.4 billion Saudi riyals ($10.5 billion) issuance of riyal-denominated (SAR) sukuk in 2013 following a sovereign-related benchmark sukuk issuance by the General Authority of Civil Aviation (GACA) in early 2012. This strong flow continued in 2014 with another $10.3 billion issued in January-July 2014.

“We expect the Saudi sukuk market to continue to grow, holding its place as the second largest sukuk market after Malaysia. The record issuance was driven by strong investor demand, strong demand from local banks deploying their excess liquidity, increased financing opportunities with respect to the country’s large-scale infrastructure projects and large quasi-sovereign benchmark issuances that have helped to set a yield curve in the country,” said Howladar.

Government-related borrowers

In the UAE, the governments of Dubai, Abu Dhabi and most recently Sharjah are active in the international sukuk market, driven by the US dollar currency peg, large financing needs and leverage appetite. However, given the state dominance of the economy, the majority of issuance has been from government-related borrowers. These issuers collectively lead international issuance globally with over $26.8 billion of sukuk outstanding and have attracted substantial global investor interest.

“While direct sovereign borrowing represents only $5.2 billion of the total, the proportion of sukuk versus conventional issuance is rising. And similar to other GCC sovereigns, this trend is likely to continue given the Dubai government’s explicit ambition to become the centre of the Islamic Economy” said Howladar.

In Qatar, the government has developed a sovereign sukuk yield curve by issuing large, long-term paper to support its Islamic finance policy goals and provide local Islamic banks with a liquid supply of Sharia compliant investments. Despite the small size of its domestic capital market, Qatar’s government is actively helping to deepen the sukuk portion of that market

Despite the relatively small size of its economy, Bahrain has a very deep, but fragmented base of around 24 Islamic financial institutions plus associated funds, takaful insurers, industry bodies and ancillary financial services that are commensurate with its pioneering hub status. While the country may be losing ground in recent years to its larger neighbours in terms of sukuk issuance and banking assets, the Central Bank of Bahrain (CBB, unrated) has indicated that it is focusing on a strong regulatory environment to support its status as key Islamic financial centre.

(Gulfnews.Com / 07 September 2014)

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GCC takaful industry set to stay on the path

Dubai: The takaful industry in the Gulf Cooperation Council (GCC) countries will maintain its growth path in the next five years, but competition, operational issues and lack of qualified talent continue to pose challenges, experts told Gulf News on Monday.

Takaful, an Islamic alternative to conventional insurance, has been growing at a double-digit rate and global premiums are forecast to expand from $4 billion (Dh14.7 billion) in 2007 to $20 billion in 2017. As of 2010, takaful premiums accounted for nearly half (43 per cent) of the GCC region’s composite premiums, compared to 31 per cent nearly a decade ago, or in 2005.

Industry experts who attended the 9th Annual World Takaful Conference (WTC 2014) in Dubai on Monday said the profitability of takaful companies has been threatened not just by competition but by the lack of a uniform regulation that will allow them to operate across different markets. The industry also needs to invest in qualified professionals that will help drive the takaful business forward.

Takaful operators are likely to continue to struggle in the next few years, although some will look at alternative customer segments and explore merger options. There is, however, potential for growth, especially in the area of family takaful and medical insurance in major markets like the UAE and Oman.

Speaking on the sidelines of the conference, Gautam Datta, chief executive officer of Al Madina Takaful, said the uptake of takaful products is still low compared to conventional insurance, as operators struggle to compete for bigger market share.

“They’re trying to balance the return on equity with the competition, with the volume [among other issues],” Datta told Gulf News. “What is required is focus and broad vision. The biggest challenge is the operational aspect of making it work. And that is not just a challenge for takaful but for any new entrant in the market.”

However, Datta said, the industry will continue to record double-digit growth in the short term. “The GCC takaful premiums as of 2012 were roughly about $1.7 billion if I take Saudi Arabia out,” he said. “The CAGR has been in the region of about 10 to 12 per cent and I think that would be maintained, if not increased, in the next few years because of the growth in medical in the UAE and Oman.”

Christian Gregorowicz, chief executive officer of Nextcare, said that with a price-driven market like the UAE, takaful companies need to rethink their strategies, come up with new products and strengthen their customer service to stand out, and if not, sustain their business.

“The industry is on a challenging path because it’s been trying to establish itself as an alternative to conventional [insurance],” Gregorowicz told Gulf News. “It’s facing tough competition on growing its market share and on making its profitability comparable to conventional industry.

“There is price competition, especially in the UAE. At the end of the day, everything is about price.”

Globally, the takaful sector is forecast to grow by 16 per cent annually in the coming years. David McLean, chief executive of WTC, said the projection indicates a ‘slight deceleration’ when compared to the average 22 per cent growth rate that the industry achieved between 2007 and 2011.

“Though the industry has achieved significant market share in its key markets, including the Kingdom of Saudi Arabia, Malaysia, Bahrain and the UAE, the acquisition of market share has not necessarily translated into sustainable profitability levels in many instances,” he said. “Financial performance, return on equity and the quality of growth remain key challenges for takaful operators in many markets.”

(Business Gneral / 18 April 2014)

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Primary issuance of GCC bonds, sukuk total $98 bn in 2013

The aggregate primary issuance of bonds and sukuk in the GCC totalled $97.7 billion in 2013, a 14.5 per cent increase from the total amount raised in 2012, the Kuwait Financial Centre (Markaz) announced in a report.

The month of March predominated in terms of issuance frequency with 44 issuances, Markaz said. However, October witnessed the highest value as $13.5 billion worth of instruments were issued, representing 13.8 per cent of the total amount issued, through 29 issuances.

Central Banks Local Issuances (CBLI): A total of $51.5billion was raised by the GCC central banks of Kuwait, Bahrain, Qatar, and Oman during 2013, with the Central Bank of Kuwait raising the highest amount: $25.4 billion, representing 49.3 per cent of the total CBLI amount through 66 issuances. The Central Bank of Qatar raised a total of $16.20 billion, a considerable increase of 172.55 per cent from $5.94 billion raised in 2012.

Central Bank Local Issuances are debt securities issued by GCC central banks in local currencies and maturities of less than 1 year, to regulate the levels of domestic liquidity.

A total of $46.1 billion was raised by Sovereign and Corporate bond and sukuk issuances in 2013, an increase of 2.3 per cent from the total value raised in 2012. The GCC bonds market is composed of sovereign and corporate bonds and sukuk issuances denominated in local and foreign currencies.

Geographical Allocation: Issuances by UAE entities raised the largest amount in 2013 representing 41.4per cent of the total amount, or $18.8 billion, and were the most active in terms of issuance frequency with 111 issuances representing 67.8per cent of the total number of issuances. Saudi Arabian entities raised the second highest amount during 2013, $17.2 billion while Qatari entities raised $6.7 billion. From Kuwait, United Real Estate Company was the sole corporate issuer which issued a 5 year bond with fixed and floating tranches, raising a total of KWD60 million ($210 million).

Sovereign Vs Corporate: During 2013, corporate issuances dominated the majority of the amount raised, with $42.9 billion or 93.0per cent of the total amount raised. Sovereign issuances raised $3.3 billion representing 7.0per cent of the total amount through 4 issuances compared to $6.7 billion raised in 2012 through 8 issuances. Three of the four sovereign issuances were from UAE while the fourth one was from Bahrain.

Conventional Vs Sukuk: Conventional issuances raised $23.7 billion, or 51.4per cent of the total amount raised in GCC bonds and sukuk market during 2013.This was an increase of 2.5per cent as compared to 2012. Conventional issuances slightly surpassed the value raised by sukuk which totalled $22.3 billion in 2013.

Sector Allocation: The Financial Services entities accounted for the largest amount raised during the year, with $19.8 billion representing 42.9 per cent of the total amount raised, through 122 issuances. The Government sector accounted for the second largest amount with $7.3 billion through five new issues.

Maturity Profile: Bonds with tenures of five-years raised the highest amount, $13.3 billion, through 30 issuances, representing 28.8per cent of the total amount raised. There were three new GCC issuances with 30-year maturity, raising a total of $2.0 billion. 2013 also witnessed the issuance of five perpetual issues which raised a total of $3.1 billion.

Issue Size Profile: GCC bonds and sukuk issuances during 2013 had issue sizes ranging from $2.0 million to $4.0 billion. Bonds and sukuk with issue sizes equal to or greater than $1 billion, raised the highest amount at $19.8 billion with 15 issuances, representing 43.1per cent of the total amount of issuances. Saudi Arabia’s General Authority of Civil Aviation Sukuk was the largest issuance in 2013, raising a total of SAR15.2 billion ($4.1 billion).

Currency Profile: The GCC bond and sukuk market in 2013 was dominated by the US Dollar denominated issuances: a total of $31.1billion was raised, representing 67.4 per cent of the total amount. Saudi Riyal-denominated issuances followed with $10.6 billion, followed by EURO denominated issues which raised $1.2 billion.

Rating: During 2013, a total of 61 issuances, or 36.9per cent of the total Sovereign and Corporate issuances, were rated by either one or more of the following rating agencies: Moody’s, Standard & Poor’s, Fitch, and Capital Intelligence.

Listing: During 2013, 73 bonds and sukuk, representing 44.2 per cent of all the bonds and sukuk issued and a total of $39.9 billion, were listed on exchanges. The number of regional bonds and sukuk listed on international exchanges were 61 issues with a total value of $28.3 billion versus 12issuances listed on regional exchanges with a total value of $11.6 billion.

As of December 31, 2013, the total amount outstanding of corporate and sovereign bonds issued by GCC entities was $241.8 billion. Corporate issuances make up the majority of the total amount outstanding with $177.4 billion, or 73.4 per cent of the total amount. Sovereign issuances amount to $64.39 billion or 26.6 per cent of the total amount.

(Oman Daily Observer / 31 March 2014)

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GCC growth, debut issues to drive sukuk rebound in 2014

JEDDAH – Qatar’s imminent sukuk issuance of roughly $3 billion will kick-start what may be a record year for the Shariah-compliant debt market, Fitch Ratings said. Regional growth and robust government spending are likely to be partially funded through sukuk programs in established Gulf Cooperation Council sukuk markets. At the same time, strong investor demand is likely to attract debut issues from Islamic and non-Islamic states in 2014.

The push by sovereigns in the region to be become an Islamic finance hub is also likely to spur sukuk issuance.

“We estimate that issuance dropped around 12 percent to $120 billion in 2013 due in part to market jitters over US bond purchase tapering. However, demand remains strong and we expect this decline to be a blip in the longer-term trend of steady growth, with 2014 issuance likely to be at least in line with 2012’s record of $137 billion,” Fitch Ratings said.

Several first-time issuers are likely to enter the market in 2014 including the UK, which plans to debut a GBP200 million sukuk this year. Luxembourg and Hong Kong have also recently taken steps to introduce new legislation that would allow the issuance of sukuk. Sovereign and sovereign-linked issuers will remain the dominant source of supply, but 2014 could also see more issues from corporates and non-sovereign entities, such as Atlanticlux Lebensversicherung’s $100 million insurance-linked sukuk that Fitch rated ‘BBB-’ in October.

Although all these issues would be relatively small, they will be a significant step in broadening the range of debt available to investors. Sub-Saharan African sovereigns have also been considering issuance for some time.

As well as the strong demand from investors who will only buy sharia-compliant securities, issuers are likely to be attracted by evidence of increasing market efficiency. Structuring costs have fallen significantly and the time taken to put together a deal has fallen from as much as six months to a few weeks. Supply and demand imbalances have sometimes led to pricing for sukuk being lower than for bonds, but we believe any difference is likely to disappear in the medium term as these imbalances lessen.

There are still challenges that will limit the attraction of sukuk to many investors and the development of a liquid secondary market. In particular these include the lack of a standardized deal structure and the lack of legal precedent over investors’ ability to enforce their rights in many jurisdictions.

Despite demand for the product, growth of sukuk is still directly linked to global issuance sentiment and issuance growth in general.

Still, growth and significant spending commitments will help boost issuance in established sukuk markets. Saudi Arabia and Abu Dhabi’s spending plans, Dubai’s preparations for the 2020 World Expo and Qatar’s plans for the 2022 FIFA World Cup are all likely to boost sukuk issuance either directly by the sovereign or by related entities. Oman, which has not been a major issuer, has also indicated it will use sukuk to fund infrastructure projects in the next few years.

(Saudi Gazette / 19 Jan 2014)

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