Dreams of Record Year Being Dashed as Sukuk Sales Slump

Global Islamic bond sales, which had the busiest first three quarters on record, are mired in what’s set to be the worst end to a year since 2008.

Borrowers have raised $1.9 billion in the fourth quarter so far, 73 percent less than in the same period a year ago, according to data compiled by Bloomberg. Issuers have also sold the fewest number of securities in six years, Bloomberg data show.

During the first nine months, the U.K., Luxembourg, South Africa and Hong Kong were among debut issuers of Islamic bonds entering a market that Ernst & Young LLP estimated will exceed $3.4 trillion by 2018. Some borrowers probably accelerated sales on concern borrowing costs may rise as the Federal Reserve ended its bond buying program, according to Jefferies International Ltd.

“It will end up being a very slow quarter, with dismal sentiment,” Richard Segal, the London-based head of international credit strategy at Jefferies, said by e-mail on Nov. 10. Explanations include “expectations of possible Fed tightening,” which encouraged borrowers to bring their sales forward, he said.

Market Volatility

The slowdown threatens to derail issuance in a year that some banks -- including CIMB Group Holdings Bhd. and Standard Chartered Saadiq -- had expected to exceed 2012’s record of $46.8 billion.

Borrowers in Malaysia, Saudi Arabia and the United Arab Emirates, all oil producers, are the biggest issuers of sukuk, according to data compiled by Bloomberg. Sales this quarter may have slowed after crude prices declined 14 percent in the period to $80.96 a barrel at 11:10 a.m. in Dubai, the lowest in four years. Economies in the six-nation Gulf Cooperation Council in the Middle East rely on oil revenue to fund growth.

“There was a lot of volatility at the end of September and the beginning of October,” Abdul Kadir Hussain, chief executive officer of Mashreq Capital DIFC Ltd., which manages about $1.2 billion, said by phone from Dubai on Nov. 10. “There were major sell-offs and major volatility, which has caused a lot of issuers to wait longer than they would have wanted to.”

The average yield on global sukuk rose to 2.82 percent on Nov. 10 from 2.77 percent on Sept. 9, the lowest since May 2013, according to a gauge compiled by Deutsche Bank AG.

Strong Pipeline

While the quarter has started slowly, Hussain said “the pipeline for the remainder of the year is quite strong.”

Issuers including Bahrain Mumtalakat Holding Co. and FlyDubai may sell debt this quarter, according to people familiar with the deals. CIMB and Standard Chartered, which rank first and fourth in arranging sukuk sales this year, said in June that issuance may rise to about $50 billion from $43.1 billion in 2013. Borrowers have raised $38.8 billion this year.

“There’s been a surge in issuance in the past few years, so a lull would be natural at some point,” Segal said. “Unusual first time issuers such as the U.K. and South Africa have entered the market, as will other non-traditional borrowers, but they are more likely to take their time.

(Bloomberg / 12 November 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com