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| 03 December, 2017

What is holding back corporate sukuk issuers in the GCC

Image used for illustrative purpose. Issuers of Islamic bonds are changing the language in documentation for new issues to reassure investors.

Image used for illustrative purpose. Issuers of Islamic bonds are changing the language in documentation for new issues to reassure investors.

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Region’s corporate and infrastructure Islamic bond market has yet to exceed double-digit growth in issuances

Dubai: Amid the rising need for corporate and infrastructure financing in the GCC, only a few corporate and infrastructure entities currently issue sukuk in the GCC.

This year saw the majority of sukuk issuance represented by Saudi Aramco, Emaar and Ezdan, with most of the issuance occurring in the early second quarter.

With such a small pool of main issuers, even if just a handful of new sukuk issuers tap the capital markets in a given year, the result could have a big impact on overall volumes.

A number of a factors have been responsible relatively low number of corporate sukuk issuance. GCC governments have so far prioritised external capital market funding for plugging fiscal deficits rather than for their corporate and infrastructure government-related entities.

Prevailing subdued oil prices of $45-$60 per barrel (for Brent) continue to lead to fiscal deficits for GCC nations, which in turn necessitates government borrowing.

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This has led to about $90 billion of GCC capital market issuance (bonds and sukuk) across all sectors (governments, financial institutions and corporates) as of September 30, 2017, compared with $54 billion of issuance over the same period of last year, with most of the increase attributed to government sukuk issuance.

According to S&P analysts, governments and policymakers in the region are yet to be fully convinced of the merits of the private finance model for infrastructure. Most infrastructure continues to be funded directly by governments by way of public procurement and undertaken by key government related entities (GREs). With the exception of the power markets, private-public partnerships remain essentially absent as funding tools for all other sectors.

The GCC corporate and infrastructure sukuk market has yet to exceed double-digit growth in issuance or to attract a wider variety of entities across the GCC region, and it continues to represent a relatively low share of total issuance for all sectors.

“We think elements such as government policy, levels of bank liquidity and lack of standardisation may be putting a break on full potential sukuk issuance from the corporate and infrastructure sector,” said Karim Nassif, an analyst with S&P. “What’s more, we have witnessed an important tail-off in corporate and infrastructure sukuk activity in the third quarter of 2017 since the Dana Gas restructuring was announced in May.”

S&P analysts said at this stage, it remains unclear what ramifications the restructuring would have for GCC corporate and infrastructure sukuk issuance and whether the market would write this off as an idiosyncratic event linked to a specific issuer or consider it something with wider ramifications for the asset class. The announced restructuring has nevertheless added uncertainty about issuance next year in this segment.

Therefore, how this episode plays out will be important to the development of future activity.

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