Global issuance reached $100 billion in the first half 2021, compared with $88.7 billion for the same period the year before, as issuance over the second quarter reached $57.4 billion for the first time, according to Refinitiv. The second quarter saw several big-ticket issuances, particularly a landmark issuance from Saudi Aramco that raised $6 billion, as well as sovereigns from Saudi Arabia, Turkey, Indonesia and Oman.
Issuers are increasingly turning to sukuk as they seek to diversify their funding and take advantage of a prolonged low interest-rate environment that is widening the return differential between developed and emerging markets. This allows issuers in the main Islamic financial markets to take advantage of lower costs of debt while tapping surging demand from investors hunting higher returns.
The sukuk market has grown rapidly over the past decade in tandem with growth in Islamic financial markets generally but also as the sukuk market has consistently generated stronger risk-adjusted returns than bonds from other emerging market countries, particularly during the pandemic.
On top of this, investors’ hunt for yield amid the current low interest rate environment has increased their appetite for risk, thereby raising the attractiveness of sukuk issuers that are rated below investment grade, such as the Malaysian, Turkish and Omani governments, which saw strong sales for their dollar sukuk issued during the second quarter. Investors are also being attracted to sukuk amid rising volatility in sovereigns such as Treasurys and British gilts. The global sell-off of bonds during the first half of 2021 encouraged many corporate and sovereign issuers to turn to Islamic finance markets, where most buyers are in it for the longer haul.
Despite this, sukuk issuance is still not meeting investor demand and total issuance remains dwarfed by that of conventional bonds. There remains a scarcity of high-quality investment products to meet the growing demand, and the relative immaturity of the market and difficulty for corporates in establishing a market presence will continue to weigh on issuance.
Although issuance is growing fast, most issuances remain large. One example of the enormous appetite for Shariah-compliant bonds was the issue in June of a $6 billion corporate sukuk from Saudi Aramco, which attracted an order book in excess of $60 billion. At the same time, Oman’s sub-investment grade $1.75 billion sukuk attracted orders totaling around $12 billon.
A broader array of sukuk products from smaller corporates could help to satiate the excess demand. Bedord Row Capital in the UK, for example, has worked to issue sukuk in Muslim-majority countries for SMEs across a range of sectors such as shipping, mining, property, financial services and renewables.
Another area where sukuk issuance could be expanded to meet demand is in green sukuk, where demand is also growing for investment products designed for sustainability purposes. Growth in issuance volumes may be spectacular, but nowhere near as spectacular as it has been for conventional green bonds. Annual sukuk issuance increased 164% over the years 2010 to 2020, but this was heavily outrun by the 5,300% growth for green bonds over the same period. Sukuk are essentially ethical financial instruments, with an inherent focus on environmental and social concerns, meaning there is huge scope for governments and corporates to increase issuance of bonds such as green sukuk that tap into this fast-growing investor demand. Instead, many issuers have sold their sukuk only as an alternative to conventional bonds, missing the opportunity to emphasize their green and socially responsible credentials and tap into the ESG market.
Recent sukuk issuances that have emphasized their green credentials have met with strong investor demand. The Islamic Development Bank in March issued its $2.5 billion Sustainability Sukuk, which attracted strong demand from investors looking for value. In September, the first green sukuk issued by a Saudi corporation, received similarly strong interest. The $1.3 billion Shariah-compliant bonds issued by Saudi Electricity Company were heavily oversubscribed. Also, in April 2021 the Malaysian government issued the world’s first sovereign sukuk to fund sustainability projects. It issued $800 million of 10-year trust certificates as well as $500 million in 30-year trust certificates, with an initial target size of $1 billion. However, the offering was oversubscribed by 6.4 times.
With global sukuk issuance for the whole of 2021 forecast to reach a new record of around $180 billion, there is clearly much attention being paid to tapping into the huge global demand for this type of financial instrument, but there is just as clearly potential for much more.
© Special Contributions 2021