Monday, October 18, 2010

Sukuk in the next year

The sukuk market has been one of the most commonly discussed areas of Islamic finance, and not without reason. It is one of the more dynamic (and cyclical) parts of the Islamic finance industry. It has also been an area that companies from the West and multilateral institutions (GE Capital, the World Bank, the International Finance Corporation, for example) have become engaged with the Islamic finance industry. When the sukuk issuance volume collapsed in 2008 and early 2009, it was viewed as the end of growth beyond 'traditional' markets for Islamic finance. This was, of course, a rush to judgement, but the rush was on in all areas from the conventional financial sector in the West, Islamic finance and in equities. In a crisis, the first thing that is lost is optimism for the future.

In the year following the bottoming of equity markets in the West following the crisis, the sukuk markets became divergent. Initially, the drop in issuance was more pronounced in the Asian markets and the GCC was able to continue on (in part, probably due to a recovering price of oil). However, around November 2009, with the onset of the Dubai debt crisis and the oncoming maturity of the $3.52 billion Nakheel sukuk, the trends changed sharply. The GCC was viewed as too risky and demand dried up for new sukuk. The primary issuance was from sovereigns with a few corporate issuers sprinkled in here and there. In contrast, the Asian sukuk markets rebounded sharply and issuance of sukuk (along with the equity markets in countries like Indonesia and Malaysia) grew rapidly. However, the recent news indicates that the growth in sukuk may be returning in the GCC and also to the West (particularly the UK, with politics interfering in the US--see my post on Thursday). Consider the headlines from just the last couple of days.Arguably, the two most important sukuk coming are the potential UK sovereign sukuk and the Total-Saudi Aramco sukuk. The former would be the completion of an effort that has stretched back several years to when Gordon Brown was prime minister. The latter would be important because of its potential size. The $1 billion sukuk would be one portion of at least $12 billion in total cost of the planned Jubail refinery.

In the regrowth of GCC credit markets, it is interesting, but not surprising, that the conventional bond market in the region has rebounded quicker following the first part of a Dubai debt restructuring and the expected resolution of trade creditor's claims of Nakheel (which will also include a sukuk for 60% of the claims). According to NCB Capital, conventional GCC bond issuance rose from $4.5 billion in the second quarter to $10.8 billion in the third quarter (14 issues in Q2 versus 26 issues in Q3). During the last quarter, issuance in the GCC was below the level of the first quarter of 2010 even as total issuance was $10.3 billion in the quarter ($9.2 billion of which came from Malaysia).

In addition to the potential issuance from the GCC, which would follow the recent growth in the conventional bonds from GCC issuers, one of the notable pieces of news is that there may be corporate and government-related sukuk coming from Canada, which has not been the source of any sukuk so far. According to Omar Kalair, the CEO of UM Financial, which is based in Toronto, HSBC Bank Canada may offer $500 million and three government-related borrowers from one Canadian province may issue $1.5 billion of sukuk (quoted by Bloomberg). As the past few years have demonstrated, the potential for sukuk is only a guide for future issuance, but regardless, it is another step forward for the internationalization of Islamic finance that new issuers could enter the market.

The fourth quarter will be a good guide to whether the regrowth of sukuk issuance globally (particularly ex-Asia and in the West) will likely continue into 2011 and the breakdown between sovereign/corporate, regional and the different structures will provide a guide to what the next year and more will bring.


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