Abu Dhabi Islamic Bank (ADIB), the largest Sharia-compliant lender in Abu Dhabi, is “optimistic” on sukuk issuances in the second half of 2019 as sukuk becomes an attractive financing option for the region, given the instability in oil prices, an executive at ADIB told Zawya.

“We see a strong pipeline of sukuk issuances coming to (the) market and we are, therefore, optimistic for the second half of the year,” said Amir Riad, head of corporate finance and investment banking at ADIB.

“Gulf Cooperation Council (GCC) Sovereigns rely heavily on oil, and the current instability associated with oil prices, lower crude oil output as well as tighter financial conditions, would encourage the sovereigns to issue sukuk as an attractive option for financing government spending,” Riad added.

Trade tensions between the world’s two biggest economies, the United States and China, have been weighing on oil prices over the last couple of months, triggering instability in prices, as investors remain uncertain on the possible outcome of the trade negotiations.

U.S. sanctions on Iran and Venezuela, as well as supply cuts from the Organization of the Petroleum Exporting Countries (OPEC), have pushed prices higher in 2019.

Data from Eikon shows that Brent crude prices have added close to 30 percent since the start of the year.

Issuance of sukuk and other debt instruments in general were relatively low in volume in the first half of 2019, according to Riad.

“This has been affected by geopolitical uncertainties, global liquidity squeeze, the US Federal Reserve's gradual interest rates increases, and higher cost of funding for issuers,” he added.

Green sukuk

Majid Al-Futtaim (MAF), a Dubai-based retailer has recently launched the first ever corporate green sukuk in the GCC, which was listed on Nasdaq Dubai this month. ADIB acted as joint lead manager and book runner on the deal. (Read more here) 

“In light of the success of (the) recent MAF green sukuk transaction, I believe that more issuers will follow suit, particularly those who want to draw attractive returns, while also having a positive environmental impact,” Riad said, adding that the issuance was nearly 5 times oversubscribed with a peak order book of $3 billion.

ADIB has also acted as joint lead manager and book runner for the Government of Indonesia’s debut sovereign green sukuk that was issued in February 2018.

One of the common criticisms of green bonds and green sukuk currently is the lack of a proper distinction as to what constitutes them and what doesn’t.

Green sukuk includes any type of debt instrument where the proceeds are used exclusively to finance or re-finance in part or in full new and/or existing eligible green projects, such as renewable energy, sustainable waste management and other projects.

“Even though, there is currently no strict definition for what constitutes a green sukuk or bond, the Climate Bonds Initiative has established a working group to focus on standardizing this around the world,” Riad said.

“Therefore, market norms and standards for green bonds and sukuk are still evolving,” he added.

The Climate Bonds Initiative is an international, investor-focused not-for-profit organisation that works to mobilise the bond market for climate change solutions. It provides standards and guidance on green bonds and publishes studies on the evolutions of the green bonds market.

Why pay the premium?

Due to more governance involved and rigorous reporting standards, green sukuk or green bonds are more expensive than conventional bonds and sukuk.

Riad told Zawya that there are environmental and reputational incentives that push issuers to pay the premium.

“Issuers, specifically those who seek to decarbonise their portfolio, pay a premium because they acknowledge their impact in addressing climate issues,” he said.

“Consequently, this boosts their reputation as it shows their commitment to being environmental stewards by funneling funds to projects earmarked as green.”

 Slow progress… opportunity for growth?

According to Moody’s Investors service, the green bond market is set to reach $200 billion this year, up from $167 billion in 2018. The ratings agency added in a report that green bond issuance rose 40 percent to $47 billion in the first quarter of 2019.

Green bonds accounted for 2.5 percent of global bond issuance in the first quarter of this year, compared to 1.7 percent in the first quarter of 2017 and 2018, and Moody’s said that it expects growth to continue in the long run.

However, Moody’s report showed that the green sukuk segment remained negligible compared to the green bond market.

ADIB’s Riad said that due to the low share of Sharia compliant offerings in green bond issuances, “the potential for growth is obvious.”

(Reporting by Gerard Aoun; Editing by Mily Chakrabarty)


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