Year in Numbers

Hostility to regulation, and particularly financial regulation, was one of the hallmarks of Donald Trump’s presidential election campaign. He insisted that the Dodd-Frank Act was hurting the US economy and promised to sweep away such rules to supercharge economic growth. He had suggested that around 70% of rules should be cut and many thought he would use his presidency to throw much regulation in the bin. The US Treasury Department’s June report to President Trump, the blueprint for this regulatory review, underscored this sentiment. “The implementation of Dodd-Frank during this period created a new set of obstacles to the recovery by imposing a series of costly regulatory requirements on banks and credit unions, most of which were either unrelated to addressing problems leading up to the financial crisis or applied in an overly prescriptive or broad manner,” it said, referring to the banking regulatory reform – officially the Dodd-Frank Wall Street Reform and Consumer Protection Act – that was signed into law by President Barack Obama in 2010. “Immediate changes, at both the regulatory and legislative level, are needed both to increase economic growth and financial stability,” it said. But despite some uncompromising language, the substance of the Treasury report is different in tone to the rhetoric of the Trump campaign. It recommends improving regulatory efficiency and effectiveness by identifying fragmentation, overlap and duplication across agencies; reducing unnecessary complexity; tailoring regulation to account for variations in the size and complexity of regulated firms; and aligning the overall regulatory regime to support liquidity, investment and lending. Bhawana Khurana, vice-president of financial services client solutions at The Smart Cube, a research and analytics provider, said: “The Treasury has been very constructive in its approach to this process. Its approach has been to look at the costs and benefits of regulations, with a lot of emphasis on what is good about the rules the US already has.” Wayne Abernathy, executive vice-president of financial institutions policy and regulatory affairs at the American Bankers Association, said: “It’s not about removing rules, it’s about making the rules work better – both for banks and regulators. Some rules actually frustrate each other, and this review will make them interact better.” While much of President Trump’s agenda feels unprecedented, his regulatory review is actually just the latest example of a system that has always waxed and waned in response to crises, said Oliver Ireland, partner in the banking and financial services practice at law firm Morrison & Foerster. “The US has a long history of over-regulating in response to crises, before gradually rolling back the rules to find a better balance. The regulatory responses to the Wall Street crash of 1929 and the savings and loan crisis that started in 1986 are two that followed similar trajectories,” he said.The devil you know If a new regulatory system were to be built from scratch, nobody would create the current US system. It is hard to envisage a regime overseen by at least 15 separate regulatory bodies ever producing clear and coherent policy. Most financial companies in the US – with the notable exceptions of Fannie Mae, Freddie Mac and the Federal Home Loan Banks – answer to at least two supervisors; depository institutions and broker-dealers answer to five or six. The result is institutionalised complexity and confusion – and that is before taking the rules themselves into account. One US bank CEO pointed out there are six regulators responsible for the Volcker Rule alone – the Volker Rule is the part of Dodd-Frank that stops banks taking “speculative” positions – and called for legislators to give full responsibility to just one. That is not to say that all regulators should be consolidated into one, the CEO stressed, but for each to have a clearer role, with fewer turf disputes between them. “If

Green bonds have made a definite impact on financing since the first issue was launched a decade ago, and now Green loans are starting to carve out their own niche as well. Though slower to catch on – Green bond issuance topped US$100bn in 2017, compared with less than €10bn in loans – Green loans have plenty of appeal for buyside and sellside alike. The data providers have yet to start specifically tracking Green loans so it’s hard to be certain, but the asset class probably began in July 2014 with a £200m deal for British supermarket group J Sainsbury. It then went quiet until a sudden surge in early 2017. Most of the first wave of Green loans came from borrowers that had already launched comparable bonds. Because they had introduced the necessary additions to their accounting and reporting systems it was a relatively simple step to use loans as an additional source of sustainable financing. And while the earliest issues tended to have a use-of-proceeds structure similar to their bond cousins, the asset class is evolving towards a model based on covenants. “This year we have seen the introduction of loans that are not specific to projects,” said Cecile Moitry, director in sustainable investment and finance at BNP Paribas. “Loans are extended to the borrower for general corporate purposes but they are also linked to sustainability performance,” Moitry told IFR. “If the borrower reaches certain targets, then a bonus is triggered.” That “bonus” comes in the form of a lower margin paid on the loan, giving borrowers plenty of incentive to stay on track with pre-defined targets. Philips has such a structure built into its syndicated €1bn five-year revolving credit facility, for example. It pays a margin linked to a sustainability rating provided by corporate governance research firm Sustainalytics. When the rating goes up, the margin goes down – and vice versa. Commercial property company Unibail-Rodamco, meanwhile, refinanced a loan with a structure that links the margin to long-term credit ratings and three Green performance indicators. “Borrowers are interested in this type of structure, as it allows them to align commitment to sustainability with the cost of financing,” said Moitry. While the extent to which the borrower benefits or is penalised is not transparent, bankers say it is only a small deviation from the overarching link to creditworthiness. Still, there is obviously value even in just a few basis points of cost savings. “It’s another step forward in the development of sustainability finance,” said Moitry. NICELY FLEXIBLE Loans are also typically more relationship-driven than bonds, which allows borrowers more flexibility while giving lenders greater scope to push for green goals. “A loan is more of a bilateral relationship than is found in the bond market,” said Tanguy Claquin, head of sustainable banking at Credit Agricole CIB. “With Green loans, banks can directly incentivise a client to improve on its ESG performance. It’s more difficult to distribute non-standardised products to a large number of participants.” This is especially important in a climate where many funds are using their cash to support banks showing dedication to ESG. “Banks need to be making a commitment to sustainability,” said Stephanie Sfakionos, head of sustainable capital markets at BNP Paribas. “They need to show to their shareholders that the lending they make has a positive ESG impact, and they need to be consistent with their clients by aligning strategies.” That alignment thus far has been mainly evident in larger syndicated, club and bilateral deals, but there is potential for expanding the practice to smaller corporates. “Green loans could be extended to help SMEs finance assets and operations with an ESG caveat, without the cost of visiting the Green bond market,” said Marie-Benedicte Beaudoin, client relations manager at Oekom Research, which specialises in rating environmental and social performance. “The structure is certainly tra

The global banking industry has undergone a painful process of restructuring since the global financial crisis. The good news for the world’s largest banks is that the crisis-induced heavy lifting that witnessed them engage in arduous deleveraging, dramatic contractions in business lines, headcount and geographical footprints – and saw European and US authorities levy more than US$300bn in fines – is essentially at an end. Institutions queued up in 2017 to laud the progress that has been made. In its Global Banking Annual Review for 2017, McKinsey says the recovery from the financial crisis is complete now that capital stocks have been replenished (they are deeper today, the firm notes, than at any time in recent memory, with the industry Tier 1 capital ratio reaching 12.4% in 2016), while banks have taken an axe to costs. The IMF takes a similar line. In its October 2017 Global Financial Stability Report, it noted that the world’s most systemically important banks (aka G-SIBs) “have significantly strengthened their balance sheets with an additional US$1trn in capital since 2009 while reducing assets. Adjusted capital ratios … have in aggregate risen steadily since the under-capitalised pre-crisis period. G-SIB liquidity has also improved: loan-to-deposit ratios are down from the elevated levels a decade ago, and reliance on short-term wholesale funding has fallen.” On a total-assets-to-tangible-book-value basis, EU banks have deleveraged by 30% since the crisis, notes Davide Serra, founder, CEO and CIO of Algebris Investments, the financial sector-focused hedge fund. Serra also points to an average 5.1% fully loaded Tier One leverage ratio (against a 3% requirement from 2018) and an average liquidity coverage ratio of 146% (versus a minimum requirement of 100%). Higher capitalisation and liquidity levels; more focused business strategies, better operational risk management; less fragmented IT architectures (the latter is still a work in progress); and the new resolution framework have certainly diminished systemic risk factors. Even banks that remain entangled in various stages of reform (such as Deutsche Bank, Credit Suisse and UniCredit) are well into restructuring phases, and from an industry perspective are idiosyncratic laggards and outliers rather than representative. Capital and cost optimisation, just like business line optimisation, has become an industry constant. The fact that banks, including recent and current reformers such as Barclays and Deutsche Bank, established financial resource management units in 2017, focusing exclusively on efficient capital allocation across the suite of core businesses, speaks volumes. More than a nuance, this is a step-change in approach and mindset. POSITIONING FOR GROWTH Given the strength of headwinds, it is perhaps too early to declare outright victory. And to be sure challenges remain. McKinsey, for example, points out that for all of the turnaround work, profits remain elusive, although that has much to do with poor underlying business conditions. The focus for banks that are through restructuring is on positioning for and investing in growth. For James Davis, a partner in Oliver Wyman’s financial service practice, a year that started with optimism around prospects for the economy and for the regulatory environment turned to disappointment through the year. “Historically low levels of volatility really held things back in markets businesses so despite a strong year for advisory and underwriting, overall industry revenues are likely to be slightly down. That’s led to a very competitive environment where most banks are looking to invest and grow but there isn’t enough revenue to go around,” he said “A big thing to watch next year will be whether we see a return of volatility that will boost markets revenues and whether management teams are able to hold the course and stick to their growth plans. At the same time, weaker revenues will redouble focus on efforts to leverage new tec

Markets like milestones, and Japan had its fair share in 2017. Even with North Korean ballistic missiles flying overhead, the Nikkei 225 closed a hair’s breadth away from 23,000 on November 7. The fact that this represented a jump of more than 33% year-on-year was remarkable enough. But more important for the market psyche was that the index had not seen those levels despite being on an upward trajectory for 30 years. The re-election of Shinzo Abe’s LDP in October 2017 was a key political milestone insofar as it presaged a period of policy continuity around key tenets of Abenomics, including the maintenance of fiscal and monetary stimulus. That boosted the market’s confidence, which was further supported by the economic data: preliminary estimates for annualised real GDP growth for the third quarter, released on November 15, came in at 1.4% – for the first seven-quarter positive showing in 16 years. Meanwhile, a bond market milestone was reached in 2017 with the return to the primary market of Tokyo Electric Power, the operator of the Fukushima nuclear power plant, for the first time since the disaster of 2011. This too played very positively to the market’s psyche as Tepco had formerly been the bellwether Japanese bond issuer. Tepco Power Grid tapped the domestic market with four dual-tranche trades over the course of 2017, raising ¥360bn (US$3.2bn). Its debt re-IPO in March restored the Japanese bond market’s natural order in some respects and was seen as a symbolic return. Softbank was front-and-centre of activity in 2017. The Japanese tech giant closed Asia’s largest-ever syndicated bank facility, a ¥2.65trn senior and hybrid loan package to refinance its Sprint acquisition loan and the bridge loan backing its £24bn takeover of chip designer Arm Holdings. It took ¥450bn from the domestic bond market in March; played into demand for yield in July with a US$4.5bn dual-tranche dollar hybrid (the largest-ever dollar perp) and raised US$6bn in dollar and euro senior notes in September – the biggest-ever sub-investment grade bond issue from Japan that pulled in orders of more than US$20bn. In M&A, the company was behind six of the dozen biggest outbound Japanese deals of 2017 (to mid-November). It acquired robotics company Boston Dynamics and investment company Fortress. In the wake of the collapse of the Sprint/T-Mobile merger, it said it would increase its majority stake in Sprint. It also upped its stake in the Intelsat/OneWeb combo. The company or its Vision Fund acquired stakes in Chinese software company Xiaoju Kuaizhi, New York-based shared workspace provider WeWork, Indian wired telecoms carrier One97 Communications, New York biopharma Roivant Sciences and ANI Technologies, an Indian provider of taxi services. ROBUST ACTIVITY Activity generally in Japanese capital markets was buoyant in 2017. The jumbo US$11.5bn second privatisation tranche of Japan Post Holdings pushed Japanese ECM to a four-year high. Japanese debt issuance, meanwhile, and within that issuance of corporate bonds, both set volume records as issuers rushed to take advantage of historically low yields. Among key trends of 2017 was a willingness by investors to move down the investment-grade credit curve and to buy longer-dated paper. The market saw corporates crowd into the 10-year space and beyond. “There was a balance of supply/demand factors here,” said Naoyuki Takashina, co-head of Nomura’s international DCM business in Japan. “Coupons of 0.1bp–0.2bp for short to medium-term tenors were unattractive for buy-and-hold investors, so they were happy to take longer duration risk.” The past year was also characterised by a significant increase in non-yen funding, particularly in US dollars. “Japanese corporates had been monitoring the international market for some time but were relatively slow to move forward. In 2017, the favourable dollar-yen basis and continuously constructive market conditions made US dollar funding very attractive,” said Tatsuya Y

Do investment banks have a recruitment problem? Bankers these days often complain that the best coders and most talented graduates are turning their backs on finance and opting for career paths where they can earn well while enjoying a better lifestyle. Yet at the same time, banks have been accused of ignoring talented students because they are from the “wrong” background or don’t have the right accent or look. Senior bankers admit it’s a problem. They say there’s far less bias in the system than 20 years ago, but know if they can lure more over-achievers from blue-collar backgrounds it may help them in their fight for talent. “There’s now a business argument, not just a social argument,” said Lee Elliot Major, chief executive at Sutton Trust, a foundation set up in 1997 that aims to improve social mobility in Britain through education. “Ten years ago, banks tended to look at it through the corporate social responsibility lens because it’s good for society to help social mobility. But now there’s also a core, hard-nosed business reason: can they attract talent in a world that’s much more competitive for the best talent?” It’s an issue on Wall Street just as it is in the City of London, as evidence mounts that investment banking is slipping down the wish-list for top graduates. BRAIN DRAIN? Numerous surveys show students at leading universities are less interested in investment banking than graduates were 20, 10 or even five years ago. A recent survey of more than 20,000 new graduates at leading British universities showed the number applying to investment banks and finance dropped by a fifth from a year ago, according to High Fliers, a research firm for graduate employment. At Harvard, the number of MBA graduates heading to investment banks has remained relatively stable at 5% each year from 2012 to 2017, but the number going into finance more broadly was 31% this year compared with 35% in 2012. Recruiters say banking still struggles with its “men in suits” image. A hard-charging career on Wall Street may have been seen as the place to be through the 1980s, 1990s and early 2000s, but the financial crisis battered that image and prompted a rethink on work/life balance. Remuneration remains a trump card for investment banks, even if the annual bonus round is now more restrained. Investment banking paid UK graduates more than any other industry in 2017, with a median starting salary of £47,000 and even the lowest end of the expected range well above what their peers heading to, for example, oil and energy, engineering and consulting would get, a High Fliers survey showed. But the bonus cheque is becoming less important. And technology and other start-up firms can offer equity and a more attractive, nimble and dynamic workplace, recruiters say. Accounting and consulting firms are also seeing a resurgence in applications, and competition is coming from many sectors. More graduates who join banks are also leaving in their first few years for private equity, hedge funds or a career away from finance. “We know banking is no longer the top option for many people, but the level of graduates who leave is still surprising,” said a senior executive at a bank in London. He claimed that was despite an improvement in work environment and culture. But it is relative, and investment banks remain vastly oversubscribed: one industry source said there are still 50–100 graduate applications for each position in London. As a result, they can still afford to be fussy. Some reckon that may have shielded the industry from changing an outdated recruitment policy, even if the net is being cast wider to a more diverse group of students than in the past. A senior executive at a bank on Wall Street said his firm had cut back how many campuses it visited and was focusing on some core schools – and some Ivy League names weren’t on the list as it looked for more of a mix. He, and others, said that showed a change in mindset. BACKGROUND MATTERS Critics say more

After the latest run of hot IPOs, there is no doubt that technology is now the Asian equity investor’s sector of choice. The listings of ZhongAn Online P&C Insurance and China Literature in late 2017 caught the imagination in Hong Kong, with hundreds of thousands of retail investors piling in with orders. By first-day performance, the November debut of online publisher China Literature was the city’s hottest major listing for two decades. Investors in the region are crying out for more opportunities to invest in fast-growing businesses, even welcoming companies that have yet to turn profitable. The surging interest makes it clear why Asian stock exchanges are so keen to attract more technology companies to list on their bourses, rather than the US. The reforms deemed necessary to ensure that Asia companies choose to list in their home region, however, are proving controversial. Hong Kong and Singapore’s exchange operators have each tabled proposals to allow listings from companies with dual-class shareholding structures – a popular feature in the technology world. The Singapore Exchange tabled proposals in February to accommodate weighted voting rights, subject to certain provisions, and clarified in July that it would allow secondary listings from companies with a dual-class share structure that are primarily listed in any of 22 developed markets – as defined by index providers FTSE and MSCI. In June, Hong Kong Exchanges and Clearing revived plans to allow dual-class shares in a concept paper on the creation of a new third board. The Hong Kong government has since weighed in on the debate in favour of allowing dual-class structures on the exchange’s Main Board, and the exchange plans to publish its response to the consultation process by the end of the year. Both exchanges are expected to push ahead, but there are questions that need to be answered. Will the proposals attract more listings? What safeguards are required to protect minority investors? Will it trigger a race to the bottom in corporate governance standards? And, with Hong Kong-listed Tencent crossing a market cap of US$500bn in November, are reforms even necessary at all? NO THIRD BOARD HKEx’s proposals outlined the creation of a new third board for new economy companies, split into two segments. These are the New Board Pro, targeted at early-stage companies that do not meet the current listing criteria, and the New Board Premium, which is for more established companies that are ineligible to list in Hong Kong because of their corporate governance structures. Both would allow companies to sell shares with weighted voting rights. HKEx also said it would accommodate secondary listings from firms with unequal voting rights. The Hong Kong government has since hinted that it would drop plans for a third board to allow companies with dual-class structures to list on the Main Board through the creation of a special chapter. “The first principle adopted is that perhaps we do not need to create a new board for these purposes, but instead, in the listing rule set up a new chapter,” Financial Secretary Paul Chan Mo-po said in November. The latest comments have been welcomed by most market participants. “My initial feeling is that it’s a sensible route forward,” said Keith Pogson, senior partner for financial services at consultancy firm EY. Bankers pointed out that the purpose of the proposals was mainly to attract secondary listings from some of the large Chinese tech firms such as Alibaba. Listing on the Main Board would be a more attractive option for them than a start-up board with limited liquidity. Still, there is a concern that by scrapping the third board, Hong Kong will need to do more to attract start-up firms. James Fok, HKEx’s head of group strategy, declined to comment on the specific proposals since the conclusions to the concept paper have not been published, although he said that HKEx should do more to attract fast-growing start-ups. “It’s certainly the

Even before then-president Bill Clinton signed the 1999 legislation repealing the Glass-Steagall Act, banks had begun transforming themselves into global financial supermarkets. Citicorp and Travelers had already announced their merger the previous year to create what was then the world’s largest financial services company. Overall, big firms snapped up more than 50 standalone investment banks between 1998 and 2001. And it was not only US institutions doing the acquiring: seeking a foothold in the world’s deepest capital market, European institutions came calling to the United States as well. UBS acquired PaineWebber and Dillon Read; Credit Suisse, which bought First Boston in 1990, acquired Donaldson Lufkin & Jenrette; and Deutsche Bank snapped up Bankers Trust. Now, roughly two decades later, some in the industry think it might be time to revisit the idea of the standalone investment bank – not least because post-crisis rules have made the global model less efficient. In the US, foreign banks have been forced to set up intermediate holding companies, where they have to hold more capital and submit to rigorous stress tests. UK-listed banks, such as Barclays and HSBC, are being forced to structurally separate out their investment banking operations. In general, it is now more difficult to move capital freely – and thus to operate as a genuinely global firm. “The regulatory environment requires you to hold more liquidity against one unit of risk in the investment bank,” said one senior FIG banker. “Creating a standalone investment bank would mark a return to the glory days, when a dollar you earn can be put to work in any other part of the world.” The idea has been appealing to more than a few bankers. In the run-up to his resignation as co-chief executive of Deutsche Bank in 2015, Anshu Jain talked about turning the bank into the “Goldman Sachs of Europe”, a partially spun-off investment bank that would be ring-fenced from Deutsche’s retail operations. And that same year, Barclays group CFO Tushar Morzaria said the prospect of hiving off Barclays US would give the bank strategic flexibility. The bank’s US operations had “independent boards and their own governance associated with them”, he said. “They genuinely are available for sale.” Investors, too, have seen the logic of a standalone investment banking institution as a way of unlocking shareholder value. When Rudolf Bohli, head of activist investor RBR Capital Advisors, launched his campaign in October to break up Credit Suisse, he envisioned three separate businesses – and said he would float the investment bank operation. “Banks are dinosaurs,” he said. In the end, the campaign did not find much traction, not least because CEO Tidjane Thiam was already two years into an intensive restructuring plan that involves cutting capital in the investment bank, redeploying into its asset management business and winding down non-core operations. GAUGING INTEREST Still, not everyone is convinced that there is value there to be unlocked. “The question is how much shareholders will be willing to pay for a standalone investment bank,” said the senior FIG banker. “Ten years ago that price was zero, which is why they all converted to universal banks. You could in theory spin off an investment bank, but the question is whether it can get a sufficient rating. Clients only care if you are a sufficient counterparty credit – and whether you have sufficient equity.” In addition, most banks moved away from the model in the aftermath of the crisis, opting instead for a more diversified entity combining corporate and investment banking. In rough terms, monoline or standalone investment banks are defined as those firms that derive at least two-thirds of their revenues from capital markets and wealth management activities. By that definition, both Goldman Sachs and Morgan Stanley would still be classified as standalone, though both are also following the over-arching industry trend towards diver

Saudi Arabia struggled to balance the budget through most of the 1980s and 1990s. But then, in 2003, with the country on the verge of being downgraded to junk because of its soaring national debt, its fortunes suddenly changed. The price of oil – the kingdom’s biggest export – rocketed, and began a long climb that would rain riches down on the country, funding what was to be a golden decade. By 2012, oil revenues had swollen to US$305bn a year – five times what they had averaged before the boom. Flush with cash, the government spent freely, quadrupling its budget, and creating over a million new public sector jobs. GDP doubled, the national debt was paid off, and US$745bn of reserves were put aside for a rainy day. Saudi, once a debtor nation, became a major global creditor. The good times are now over. An ill-judged attempt to kill off US shale drillers by ramping up production, and a subsequent attempt to shore up falling prices have hit Saudi hard. Oil revenues, the source of almost all government revenues, are down 70%. The deficit is almost US$100bn a year. Cash is so tight that businesses in the kingdom complain that bills sent to the government often go unpaid for months. Riyadh, in a bid to fill that hole, has already spent US$260bn – one-third of its reserves. It is also once again a borrower: over the past two years it has borrowed US$39bn from the global bond markets and US$10bn in bank loans. It’s also launched a programme to sell off up to 150 state-owned companies. The process could raise US$300bn for Riyadh – and force major change on the way the economy is run. “Saudi Arabia has been through challenges: it now realises that the economy has to diversify away from oil, and that it needs to attract capital from abroad,” said Steve Drake, head of Middle East capital markets at PwC. “It’s going to be a major shift culturally, organisationally and strategically, of the Saudis being subjected to very different stakeholders with very different expectations.” CAPITAL MARKETS Saudi hopes that the privatisation process, as well as raising much-needed revenue for the government, will also help bolster local capital markets at a time when the country needs to attract capital. As well as the financial pressures, the kingdom faces some big social challenges, including the need to provide work for the 4.5m Saudis expected to enter the workforce over the next decade. The government is well aware that the current economic model is insufficient to absorb a glut of workers. The public sector employs two-thirds of Saudi nationals and provides 81% of household income. With public sector finances under acute pressure, the government needs to strengthen its private sector, which in turn needs capital to invest, grow, and put Saudis to work. But the kingdom’s capital markets in their current state are likely to prove insufficient to fund the US$4trn of investment that McKinsey says is needed over the next decade. Trading activity on the country’s Tadawul stock exchange has fallen by two-thirds over the last few years, to just US$1bn a day. This year, equity issuance has fallen to its lowest in more than a decade. “The government realises that it needs to get private capital flowing, and that it needs to dramatically boost liquidity in its domestic capital markets,” said a regional head at one major global bank. “The state has had to lead all major investments in the past, but now there is a need for the private sector to play a much bigger role. The appetite for change is real.” Already this year, the kingdom has overhauled the regulatory apparatus in a bid to entice foreign money in and increase liquidity. Rules that heavily restricted the presence of foreign investors in the country have been eased, while the stock exchange has moved its settlement processes into line with global norms and allowed covered short-selling for the first time. Recent rule changes have specifically been driven with one particular target in mind: index pro

The fall in the price of oil in recent years has been a game-changer for Islamic bonds, tilting issuance towards the Middle Eastern countries that have traditionally had little need for debt financing. Whether these issuers remain in the market once the oil price recovers remains to be seen, but most expect they will be active again in 2018, at least. Patrick Drum, portfolio manager at the Amana Participation Fund, which invests primarily in Islamic debt, principally sukuk, said: “The fall in the price of oil has created a real opportunity. The region’s hydrocarbon financing model is broken and sukuk can step in to allow Middle Eastern sovereigns to offset their deficit funding. We are talking about countries with a solid investment-grade status such as Kuwait, Saudi Arabia and Qatar, which will appeal to a lot of investors.” The year saw US$27bn of international sukuk issuance to November, around US$6bn more than was issued in the same period in 2016 and nearly US$2.5bn more than was achieved in the whole of that year. Sovereigns and public-sector bodies have driven this issuance. In January, Investment Corporation of Dubai issued US$1bn of 10-year sukuk, before a Saudi dual-tranche US$9bn offering in April became the largest sukuk transaction ever sold. In May, Oman easily raised US$2bn with a seven-year issue, while Bahrain raised US$850m via sukuk in September as part of a broader US$3bn three-tranche financing. Usman Ahmed, head of Citigroup’s Islamic bank in Bahrain, said: “I expect to see growth in the sukuk market continue during next year. A significant portion of capital markets activity from the MENA region will continue to come in sukuk format, driven by investor appetite.” PAYMENTS HALTED The year has not all been plain sailing, however. Storm clouds gathered on the horizon in June when Sharjah-based issuer Dana Gas announced it would halt payments on two US$350m sukuk issues, citing changes in the interpretation of Islamic scholars that it argued rendered their structure non-compliant. This news, and the proposed restructuring that resulted, dealt a significant reputational blow to the sukuk market, leaving investors wondering whether other deals could be similarly affected. That is unlikely: the issues around the Dana Gas sukuk were unique to the UAE Civil Law Code, which must apply to all mudaraba structures under UAE law. Observers say this code does not even apply to all sukuk in the UAE, let alone elsewhere, making the legal uncertainty around the Dana Gas deal largely irrelevant to the broader market. Investors apparently agree, with a number of issues having completed – and being well received – since the dispute started and a number more roadshowing at the time of writing. In November, London High Court judge George Leggatt ruled in favour of the creditors, demanding that Dana Gas repay the US$700m of bonds, providing further comfort, and a separate court hearing will take place in Sharjah to determine whether the mudaraba structure is valid under UAE law. In other words, the two hearings are about different things, which complicates matters, as does the fact that Dana has said it will appeal against the English court ruling. Drum said: “Justice Leggatt’s ruling with Dana has provided the legal proceeding to protect investors’ interests but this case is unfolding and Dana’s response to the judgment will have important implications for investors and issuers for some time to come. The ruling needs to be upheld; if it is, this could actually prove to be a catalyst for further growth in the market.” The problem with Dana Gas was first and foremost a credit issue, said Drum. “It was clearly high risk, it has had issues in the past, including a restructuring in May 2013, and it operates in countries with challenging economies. Dana’s behaviour is highly disingenuous, but it is not fatal for the broader market.” If GCC countries are serious about this market, they need to act with consistency and integrity to e