Wednesday, April 16, 2014

Integration and standardization key to more international Sukuk issuances


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Wednesday 16th April 2014
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GLOBAL: The global Sukuk market is currently seen to operate as a collection of regional or local markets. This notion was expounded in a report released by S&P entitled, “Despite Players' Global Aspirations, Lack of Integration Keeps Sukuk Issuance a Local Affair”.

According to S&P, over the past 10 years, local Sukuk issuances in Malaysia and the GCC countries have helped fuel impressive growth in domestic Sukuk. However, of the US$117 billion in Sukuk issued in 2013, only 16% were termed “international” (listed on major exchanges and generally issued in hard currencies, such as US dollars). Based on S&P estimations, since 2001 only 20 international Sukuk issuances were made from issuers domiciled outside the abovementioned countries, accounting for approximately US$10 billion. For the year 2013, issuers outside these two core markets contributed only US$3.8 billion out of US$18.8 billion in international Sukuk issuances.

In an exclusive interview with Islamic Finance news yesterday, Mohamed Damak, primary credit analyst at S&P pointed out contributing factors to the popularity of domestic Sukuk issuances. “The structure of the market and the fact that a significant amount of issuance in Malaysia is done by the central bank (US$50 billion in 2013), offers a liquidity management instrument in local currency to banks operating in the country. In 2007-2008, issuers from Malaysia contributed to less than 50% of the issuance while in 2013, it contributed to almost 70%,” said Damak. In addition to that, Damak explained that high local currency liquidity in some markets and high demand for Sukuk in areas such in the GCC are also the reasons as to why issuers turn to the local Sukuk market.

The premium for international Sukuk issuances has not deterred issuers in coming to the market. However, a higher level of clarity and standardization in terms of documentation and default resolution mechanisms may assist in lowering issuance costs and reduce yields to comparable levels with conventional bonds. Based on the report, interest from issuers outside traditional markets has increased, due to the fact that Shariah compliance attracts deep-pocketed Middle Eastern and Asian investors. In the near future, S&P expects this premium to reduce as Sukuk documentation becomes more standardized and liquidity stronger.

“We think that after the slowdown last year, with Sukuk volumes declining by 13%, we anticipate that the Sukuk industry will expand again in 2014, partly driven by corporate and infrastructure issuers in the Gulf. Indeed, we believe that total issuance will exceed US$100 billion for the third year in a row if yields remain attractive for issuers. We also believe issuance could pick up again in Malaysia in 2014 as its investment program resumes,” commented Damak on his market outlook for the coming year.

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