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Jul 04 2012

High sukuk demand makes the market more liquid for issuers

By Paul Bateman, Senior Risk Manager, Bank of London and The Middle East High sukuk demand makes the market more liquid for issuers
In these unprecedented times of low growth, loose monetary policy and European crisis, many investors and issuers are reassessing their current circumstances and capital market expectations. This environment has prompted a "risk-off" mentality, which has seen large sums flow to certain parts of the bond market, particularly those issued by the German and US governments, as well as the dollar-based sukuk market.

The high level of demand for dollar sukuk is also a boon to those seeking debt financing. In the first half of 2012, there has been more than USD 7.7 billion in issuance, when selecting only the more liquid deals with an issue size exceeding USD 100 million. All such deals have featured a fixed profit rate with a tenor of not less than five years, as borrowers wish to lock in the low cost of borrowing for a long period.

Such has been the level of demand that a number of transactions were oversubscribed multiple times, and issuers such as the Government of Dubai and Saudi Electricity Company managed to place sizeable deals in the 10-year space.

Structural adventurism is in evidence too, with a new securitization from Tamweel in the pipeline for late-June/early July, following the success of a 2007 asset-backed deal. However, the number of obligors has been limited to 11, which presents a challenge for those seeking to establish a diversified portfolio of dollar sukuk, particularly as existing names mature. In fact, past sukuk issuers such as Emirates and Majid Al Futtaim have favoured the conventional debt market recently.

While investors will have been relieved by the recent successful maturity of sukuk deals from United Real Estate Co, Emirates and the DIFC, these obligors have effectively disappeared from the universe of investible dollar sukuk. Geographic concentration also remains a feature of the recent deal pipeline, with no such non-GCC issues from the like of General Electric or Nomura seen recently. Obligors tend to be either government-related, or from the financial sector, with fewer independent corporate issuers tapping the market as they do in other jurisdictions.

One sub-sector of the dollar sukuk market that has been particularly under-represented by the 2012 issuance pipeline is high yield. The absence of recent high-yield issuances has been surprising given the latent demand for dollar sukuk. Aside from the steady flow of investment grade deals seen in 2012, the only high-yield example which stands out was the Jebel Ali Free Zone sukuk maturing in June 2017. This B+ rated deal was issued at a price of USD 100 in early June and had reached a price exceeding USD 105 by June 26, 2012.

Participants in the global debt capital markets should take note: there is strong demand for obligations structured according to Islamic principles in a market which has now reached sufficient maturity to accommodate obligors from a variety of backgrounds, varying by credit quality and geographic location.

Paul Bateman has been a senior risk manager at Bank of London and The Middle East since 2009. Prior to this he was a consultant at Threadneedle Asset Management.

© Zawya 2012

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