Sovereign Germany might be disappointed that its recent Eurobond offering was not fully subscribed. Perhaps in hindsight, had it instead opted to issue a debut Eurosukuk for the same amount, the story might well have been different.
Sukuk issuers, whether conventional entities such as HSBC Middle East or Goldman Sachs (both of which tapped the sukuk market in 2011, or Islamic banks, agree that market conditions in the sukuk space is more favorable than in the conventional space. And this confidence and appetite for Sukuk is backed by rising demand from big institutional investors in the Middle East and Asia. (source)
Despite a difficult global financial climate and the continuing euro zone sovereign debt crisis, sukuk issuance has shown a remarkable resilience over the last year or so, with origination - both sovereign and corporate - gaining a second wind over the last few months if not weeks. Investors in sukuk in general are proving to be all-weather friends with their healthy appetite for such instruments, rather than their fair weather counterparts in the conventional bond market.
Even in troubled Bahrain, the latest monthly BD20 million issuance of short-term Sukuk Al-Ijarah in November by the Central Bank of Bahrain (CBB) on behalf of the government of Bahrain was oversubscribed by 135 percent.
Respected regulators such as Zeti Akhtar Aziz, governor of Bank Negara Malaysia, the central bank, are cautious not to talk up the Sukuk market. In Kuala Lumpur last week, she was at pains to stress that the development of the sukuk market going forward will depend on market conditions and the dynamics of individual issuers. However, given the fact that many of the Muslim countries have been less directly affected by the global financial and euro zone crisis, they are in a better position to raise funds from the market than others.
"Several of the European countries including the UK, France and Luxembourg have introduced enabling legislation to facilitating Sukuk including tax neutrality structures. This has been a major step forward. They are currently focused on conditions that are highly challenging, therefore it is very difficult. Of course if there were a sovereign Sukuk issuance out of the Euromarket, we would certainly support it. I have always encouraged our sovereign issuances which have contributed depth to the market," explained Zeti.
On the sovereign and quasi-sovereign side, there are mixed prospects for the market. Indonesia priced its second international sovereign issuance in mid-November - a $1 billion 7-year REG S/I44A Fixed-rate Trust Certificates (sukuk) due in 2018- at par to yield a tight 4 percent. This despite the fact that the issuance, lead managed by Citi, HSBC and Standard Chartered Bank, is rated Bal by Moody's, BB+ by Standard and Poor's and BB+ by Fitch. The pricing achieved was 25 basis points tighter than the initial price guidance of 4.25 percent, easily the lowest coupon ever for an international US dollar issuance - bond or sukuk - by sovereign Indonesia.
The certificates were issued by a special purpose vehicle, Perusahaan Penerbit SBSN Indonesia II established by the Indonesian government, and will be listed on the Singapore Stock Exchange.
Once again, investors rose to the occasion with the order book topping $6.5 billion at one stage. Middle East investors trying to diversify away from the volatile US and Euro markets took up 30 percent of the Indonesian offering; with 12 percent going to local investors; 32 percent to regional Asian investors; l8 percent to European investors and the remaining 8 percent to US investors.
Elsewhere the sovereign sukuk market prospects is best described as “work in progress”. Turkey, for instance, seems to be making progress on its long-awaited sovereign Sukuk issuance. Central Bank of Turkey sources confirmed that the issuance is still very much on the agenda, although the final decision to be taken by the Treasury will depend on market conditions and timing. The sentiments at the moment are that with the neighboring euro zone countries consumed by a pernicious sovereign debt crisis, Ankara is preoccupied with the potential fallout of the crisis given that 40 per cent of Turkish exports are directed towards markets in the euro zone especially Germany.
However, the sources mentioned that there is progress in other aspects. In February, the Turkish Parliament adopted tax neutrality measures for Sukuk Al-Ijara (leasing Sukuk). This is now on the verge to be extended to other types of Sukuk structures which will give Turkish issuers more flexibility and choice in the use of structures to raise longer-term funds.
Nigeria on the other hand is finalizing a technical study on the possibility of issuing a sovereign Sukuk. Malam Sanusi Lamido Sanusi, governor of the Central Bank of Nigeria (CBN), explained on the sidelines of the meeting of the Governors of Central Banks and Monetary Authorities of the Organization of Islamic Cooperation (OIC) member countries in Kuala Lumpur last week, that the CBN is merely compiling the technical guidelines to facilitate any proposed sukuk issuance.
"The central bank does not issue sukuk. We are working through a technical committee to prepare the framework and the guidelines. On completion we will present our findings to the debt management office of the Ministry of Finance. The government will then decide whether it wants to act on this and issue a sukuk," he explained. There have been some media reports, erroneously attributed to Gov. Sanusi, that Nigeria will issue a sukuk in 2012.
Elsewhere in Africa, Senegal seems to be in pole position to issue the first sovereign sukuk issuance out of Africa. Khaled Al-Aboodi, CEO of the Jeddah-based Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Islamic Development Bank (IDB) Group, confirmed that the Corporation is working with an international consultancy and with the Central Bank of West Africa (CBWA), of which Senegal is a founder member, on the regulatory and legal framework to facilitate sukuk issuance in CBWA member countries. ICD remains confident the issuance may come to the market in first half 2012.
Reports also suggest that Iran is going to the local market to raise $15 billion to finance development and expansion in the country's oil and gas sector. However, the Iranian sukuk will not attract international investors for two key reasons. A senior Central Bank of Iran official confirmed the proposed sukuk program, of which a $5 billion tranche has already been issued. But he acknowledged that Iranian Shariah compliance parameters are much more liberal which may not be acceptable to GCC and other markets. GCC Islamic bankers concur that the Iranian structures are amore akin to conventional bonds than Islamic trust certificates.
At the same time, with the US and EU sanctions regime tightening against Tehran over its nuclear power policy, institutional investors from the Muslim countries are reluctant to have anything to do with Iranian government papers and with Iranian banks in fear of being blacklisted by the US and EU authorities.
A major boost for the Sukuk market, albeit in a specialized dimension, will come in first half 2012 when the International Islamic Liquidity Management Corporation (IILM) is expected to launch its first sukuk issuance. "It has been a long process to get the rating and high quality underlying assets, and to obtain all the parameters for the issuance. The first issuance will be a relatively smaller issuance to test the system and to ensure that it is working. It will be a pilot issuance. Subsequent regular issuances will be larger, in the range of $2 billion to $3 billion per issue under a program. The issuances will be in major currencies," confirmed Gov. Zeti, who is on the governing council of the IILM.
"In our assessment it will be high quality short-term liquid instruments and therefore will probably be in demand from other institutions as well managing portfolios, pensions etc. because this is another asset class that would be attractive as a liquid instrument. It will contribute toward better liquidity management and ensure liquidity is an important issue. Earlier attention was not focused on this. During this crisis we saw liquidity become an important issue. The internationalization of Islamic finance and greater cross-border transactions require effective short-term liquidity management not only in stressful conditions but also in normal times," she added.
The IILM governing board met in Kuala Lumpur last week and approved the parameters for the issuance, including the high quality assets and all the primary dealers that will make the market.
The corporate sukuk sector has been even more vibrant in recent months, which augurs well for the market going into 2012. The pacesetter might well be PLUS Expressways Bhd, Malaysia's biggest toll-road operator, which plans a RM32 billion ($10 billion) sukuk program to fund its expansion plans. PLUS has appointed the local CIMB Islamic Bank to help with the issuance, which will be the largest one by a single entity to date.
Recent corporate sukuk issuances that have successfully closed include the $500 million 5-year sukuk (REG S Fixed Rate Trust Certificates) offering by ADIB Sukuk Company Ltd. on behalf of Abu Dhabi Islamic Bank (ADIB) in November 2011. The certificates, rated A2 (stable outlook) and A+ (stable outlook) by Moody's and Fitch respectively, has a tight profit rate of 3.78 percent and be listed on the London Stock Exchange.
This latest sukuk offering, which matures on Nov. 30, 2016 and which was lead managed by ADIB, Citibank, HSBC, NBAD, Nomura and Standard Chartered Bank, is the third tranche under ADIB's $5 billion sukuk program initiated in 2007. The offering was oversubscribed to the tune of $2 billion with 122 investors, with the Middle East accounting for 57 percent; European investors taking up 29 percent; and Asian investors subscribing to 13 percent. Tirad Mahmoud, CEO of ADIB, stressed that the transaction reflected the strong demand from investors for the bank's credit and would further strengthened the bank's balance sheet.
At the same time, Abu Dhabi Commercial Bank (ADCB) also closed its debut 5-year $500 million Wakala-cum-Mudaraba Sukuk and rated “A” by Standard & Poor's Ratings Services, issued on its behalf by ADCB Islamic Finance (Cayman) Limited, with a pricing slightly less tight than the ADIB transaction at a profit rate of 4.071 percent, against the back drop of very volatile and challenging market conditions, according to the issuer.
Once again the order book attracted $1.4 billion of orders within 5 hours of the issuance. According to Kevin Taylor, group treasurer ADCB, the Islamic nature of the issue helped secure strong investor demand for which there continues to be pent-up appetite against the back drop of the European sovereign debt crisis.
One country that is emerging as a potentially important market for corporate sukuk especially is Turkey. Following the recent 5-year $350 million Sukuk Al-Ijarah offering by Kuveyt Turk Participation Bank - the first under Turkey's new Sukuk Al-Ijarah tax and legal regime, two other participation banks, Albaraka Turk Participation Bank (ABTP) and Asya Bank have confirmed that they are in the process of finalizing their debut Sukuk offerings.
Both offerings will be US dollar ones and the proceeds will be used to fund longer-term financing activities. The proposed Asya Bank issuance has been assigned an expected rating of “B+(exp)” by Fitch Ratings.
ABTP, accompanies by lead managers Deutsche Bank, Emirates NBD, Noor Islamic Bank and QInvest, started its sukuk road shows on Nov. 26 in Asia, which will then move to Europe and the Middle East. An ABTP source stressed that the issue may be in the region of $350 million but will; only go ahead at the right pricing and subject to market conditions.
Other entities that have confirmed their interest in raising funds from the market through sukuk issuances include the Selangor State Development Corporation (PKNS) which plans to issue a RM700 million sukuk; and Majid Al-Futtaim (MAF) Holding, the Dubai-based shopping mall developer, which plans to issue a 5-year $500 million sukuk under its $1 billion sukuk program. MAF has appointed HSBC and Standard Chartered to lead manage the issuance the proceeds of which will be used to fund the company's mall expansion plans in Lebanon, Egypt, Syria and in Erbil in Iraqi Kurdistan.
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