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Tuesday, 12 December 2017

Sukuk market off to a strong start

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Sharia-compliant bond issuance reached US$131bn last year, a 54% increase on 2011, according to research from Kuwait Finance House. The market has matured as debt issuance has evolved from the US$500m five-year template that has been the norm.

Indonesia’s US$1bn 10-year sukuk in November has helped propel the SSA sukuk market to a strong start this year. Indonesia printed not just its longest sukuk to date, it printed at tight spreads of 3.30%. That was a full 45bp inside the 3.75% coupon the sovereign had paid in April 2012 for a US$2bn 10-year conventional bond.

Confidence was instilled which boosted the market and the sukuk format, allowing Dubai to print a US$750m 10-year sukuk at par to give a profit rate of 3.875% (at the same time it also sold a US$500m 5.25% 30-year conventional tranche at 98.148 to yield 5.375% from a reverse enquiry), both via Dubai Islamic Bank, Emirates NBD, HSBC, National Bank of Abu Dhabi and Standard Chartered at the end of January. The sukuk priced 12.5bp–17.5bp inside the outstanding 6.45% 2022 sukuk which was quoted at 4.00%–4.05% at the time. It was clear that the nightmares of 2008 were a distant memory.

What is the rest of the year likely to bring? As one head of Islamic finance for a European bank says: “Although none have been announced yet, I expect more bond sales from different sovereigns. The volume of issuance shows that confidence has returned and Dubai has indicated the level at which they can print.”

At the beginning of March, the Egyptian government approved a draft law to allow the issuance of sovereign Islamic bonds. With foreign reserves under pressure and a fiscal deficit expected to hit 12.3% of GDP by the end of the second quarter, Egypt needs funds. Priced out of the conventional bond market, a sukuk deal is likely as soon as the law is passed by the Upper House and signed by President Mohamed Morsi. “It all depends on political stability,” said the banker, pointing out that parliamentary elections are due to run from April to June.

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