Nov 01 2011
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Sukuk gain where bonds lose in a month of firsts
GLOBAL SUKUK REVIEW: OCTOBER 2011
- Turkey steps up as a key sukuk issuer
- First Saudi project sukuk and first RMB sukuk issued
- GCC bonds retreat in favor of sukuk
- USD sukuk make a comeback
Almost a year after we saw the first corporate sukuk out of Turkey, and in line with our expectations in "Sukuk set record in first 9 months" that Turkey might surprise the market with a series of sukuk issues in 4Q 2011, the market welcomed the second issuance by Kuwait Finance House's Turkish subsidiary.
The five-year USD 350 million sukuk, the second by the Turkish bank, was sold in the international markets and listed on London Stock Exchange. It pays 5.875% semi-annually.
Asya Katilim Bankasi (Bank Asya) announced that it has mandated Citigroup and UBS to issue sukuk in the international markets with a maximum term of five years and up to USD 300 million aimed at diversifying and increasing the bank's resources from abroad. Moody's assigned (P) Ba2 rating to the proposed sukuk.
Sukuk Firsts in October
Sukuk issues from Saudi Arabia are expected to roll on in the near to medium term. Sadara Chemical Company could be the third arm of Aramco to tap the sukuk market. Almarai, the region's largest dairy producer, said its shareholders will vote November 19 on a plan to issue sukuk.
Topping all this increased sukuk activity from Saudi Arabia, press reports cited the Finance Minister Ibrahim al-Assaf as saying that the kingdom may finance Jeddah's King Abdulaziz International Airport expansion project by selling sukuk. Should this take place anytime in the future, it will mark the first sovereign Saudi sukuk ever.
Adding to October's firsts, Malaysia's investment arm Khazanah managed to sell its three-year 2.9% CNY 500 million (USD 78 million) sukuk on October 13. This is the first offshore RMB sukuk that was met by an overwhelming demand despite volatile market conditions. Thus far this year, we have seen sukuk issued in 13 different currencies according to Zawya Sukuk Monitor, up from 10 currencies during the same period last year.
Indonesia issued its first project-based sukuk at an auction on October 11. The ministry of finance sold 25-year IDR 370 billion and six-month IDR 420 billion sukuk. On October 17, another IDR 3 trillion were sold in Haj sukuk. Indoensia's sale of sukuk during the first 10 months of 2011 are now at USD 2.76 billion, of which only USD 11 million came from a corporate sukuk, making it the fifth-largest issuer of sukuk this year along with Saudi Arabia, according to the Zawya Sukuk Monitor.
Indonesia, which started selling short-term sukuk this year, could return to the global sukuk market with a benchmark dollar sukuk.
Comeback of International USD Sukuk
Indonesia is not the only country expected to issue a USD sukuk soon. Unrest-hit Bahrain seems to be keen on issuing a USD sukuk as well to finance the budget deficit. Similarly, a number of corporates have expressed their interest in tapping the global sukuk market for the first time.
The ground-breaking news came from Goldman Sachs, which announced a USD 2 billion program registered and approved by the Irish Stock Exchange, providing further evidence of conventional borrowers looking to Shariah‐complaint funding sources as market volatility makes raising debt finance more difficult.
France-based Credit Agricole expressed its willingness to issue sukuk that would most probably be denominated in USD. Other global sukuk announcements included The World Bank which was reported to be exploring the potential in a number of developing countries to issue the first Green sukuk.
Source: Zawya Sukuk Monitor
More Appealing than Bonds?
The consecutive announcements by Goldman Sachs and Credit Agricole raise the question of how issuers are becoming increasingly interested in tapping the sukuk market. This is not exclusive to international issuers.
Abu Dhabi-based Taqa - a regular issuer of conventional bonds - announced last month that it is setting up a MYR 3.5 billion sukuk program. A few weeks later, Dubai-based conglomerate Majid Al Futtaim (MAF) announced it might issue a sukuk very soon. The move has been prompted as the firm finds it difficult to raise finance through the conventional route as market volatility and uncertainty abound.
MAF had previously announced a conventional USD 2 billion bond program that was shortly followed by a sukuk announcement instead. The sukuk market, which has for long time suffered severe completion from the conventional bond market given that the latter is an easier, cheaper and more well established option, could finally be finding its way to the light as issuers see it as a more stable option, and to benefit from ample liquidity in both the domestic and international markets looking for Shariah-compliant issues.
Qatar sold a QAR 50 billion domestic sukuk in January of 2011, QAR 33 billion of which were allocated to sukuk while the remaining QAR 17 billion were in the form of a conventional bond.
The GCC region witnessed a decline in bonds issuance over the past months and increased occurrence of non-deal roadshows that ended up with either shelving the sale or going for sukuk option. Examples include, besides MAF, Abu Dhabi's investment vehicle IPIC, Dolphin Energy and TDIC.
Yet, non-deal roadshows do not necessarily mean these bonds will not be issued but rather that the issuers are waiting for the right time to hit the market. After all, the GCC issuers have huge financing and refinancing needs that leave them in need of the debt market sooner or later.
Moreover, the debt of these GCC issuers is increasingly appealing for international investors seeking safe haven for their investments and seeking to diversify from and hedge the Euro debt crisis. In his MENA bonds panorama for July titled "Shy July", Joey Geadah wrote: "Market conditions coerced Abu Dhabi's Tourism Development Investment Company (TDIC) to explore proxy financing selections after holding over a planned bond sale until 4Q, despite the fact that roadshows were already completed."
Standard Chartered announced that it has conducted a non-deal investor roadshow for international investors from Asia, Europe, the UK and the US, who visited over 20 issuers from Riyadh, Abu Dhabi, Dubai, Manama and Doha.
IPIC sold a total of USD3.75 billion in bonds on October 28th making it one of the biggest GCC issuers this year with a total of USD8.1 billion according to Zawya Bonds Monitor. The three tranches are part of its Unlimited GMTN programme. Also, Kuwait's Commercial Facilities Company started a roadshow to sell up to KWD 50 million in bonds. This is the first corporate bond out of Kuwait in 2011.
According to Bassel Barbir, the senior fixed income trader at Beirut-based MENA Invest, the region is craving for new issues. With regional equities underperforming and volumes dwindling, credit seems like the salvation for much of the cash sitting around.
Overall, despite a downturn in bonds and upsurge in sukuk, both bond and sukuk markets in the GCC were bullish in 2011 and are expected to be even more bullish in 4Q-11 and 2012.
Malaysia Continues to be the Hub
As we see increased issuance from the Gulf and the rest of the world, and new entrants in terms of countries and currencies, Malaysia continues to dominate the sukuk market. Apart from being the biggest issuer of sukuk for years now, and the fact that MYR is increasingly appealing for GCC issuers, the government continues to take serious measures aiming at deepening the market and maintaining this pioneer position.
In October, Prime Minister Najib Razak said in his budget speech to parliament that Malaysia will give tax breaks on sales of Islamic bonds for three years from 2012. Income tax deductions for non-ringgit Islamic bonds will be extended to 2014, he said.
Arrangers, not only issuers, are seeking deals in Malaysia. Bahrain-based Islamic investment bank Elaf Bank said it has secured Shariah-compliant bond mandates worth at least USD 1.5 billion from three Malaysian firms.
Other regulatory sukuk developments in October include a confirmation by Oman's Capital Market Authority (CMA) that it is preparing the necessary regulations to facilitate the issuance of corporate sukuk in Oman.
Team Leader - Fixed Income
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