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GLOBAL:
Sukuk issuances in the GCC are likely to exceed conventional bonds sales
in the first quarter of 2014, attributed to record low yields. According
to a report by S&P released yesterday, Sukuk issuance in the Gulf are
likely to overtake conventional bond issuances in volume terms, repeating
their performance in the final quarter of 2013. Alternative funding via
the capital markets is believed to become an increasingly important part
of funding considerations.
There is a high probability for companies in the GCC to turn to Sukuk as
a fundraising tool due to the steady demand by investors in the region.
The key driving factors highlighted by S&P included measures such as
the caps introduced in the UAE on single government-related entities
exposure; as well as the ongoing regulation to consider allowing
perpetual Sukuk to be treated as permanent equity in a company and bank
balance sheets, which are set to spur new issues of perpetual Sukuk.
Another contributing factor is the aim of some governments to establish
Islamic finance hubs. For instance, the Dubai government has been
strategizing to create an Islamic economic hub as well as to reciprocate
to the demand from investors seeking debt issues from high-quality
counterparties across the GCC. The pricing of debt issued out of Dubai
also indicates that investors are more comfortable with the abilities of
Dubai-based issuers to refinance upcoming debt maturities, as well as to
meet the infrastructure expansion challenge associated with the Dubai
Expo 2020 plan.
Bearing testament to this, recent Sukuk issuances from Saudi Electric Co,
Dubai Investments Park Development Company (DIP) as well as Kuwait
Projects Co, were all several times oversubscribed; demonstrating the
strong demand for debt over a tight supply. According to S&P, even
entities rated in the speculative-grade categories such as DIP and Aldar
Properties are issuing successfully.
“The emergence of Sukuk as a funding structure for both speculative-grade
and investment-grade issuers leads us to believe that bank lines to these
companies may not be as freely available as before,” stated the report.
As such, the diminishing role in project funding by banks will most
likely incentivize the use of capital market funding such as Sukuk.
S&P further expects Sukuk and enhanced equipment trust certificates
to be an increasingly attractive funding tool for transportation
companies such as the airline sector, to fund infrastructure development.
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