Why is issuance of bond and sukuk booming in the first half of 2012?

Bond sales in the GCC are at levels for the first half of 2012 that have far outstripped the level of last year and are at a record pace.  The amount of issuance is being attributed to the "solidity of the economic environment" according to one bank's asset management group, adding that they have been boosted by "expansion projects and infrastructure plays in the region, the steady maturing of the institutional investment sector and the increased ability of buy-side firms to manage those institutional assets".  That may be true, and it is important to consider that they are coming from a "very low base" as a director at Exotix Ltd said.  

I agree with some of these projections, even if I don't necessarily link them specifically to the rise in new issuance.  Yesterday I was looking to find instances on my blog of a prediction that the move from the GCC to Asia would continue, and I found a post where I had jumped the gun (oops) and predicted that issuance would move back to the GCC based on a combination of a larger GDP (which I had discussed in an earlier post), the need for infrastructure finance and a limit of capacity for the Malaysian markets to absorb all the issuance needed.  Long term, this is still likely to happen, but for this post at least, the focus is on the first half of 2012 where there was indeed record bond issuance in the GCC (combined conventional bond and sukuk). 

I agree that long-term the factors listed as causes for the surge of issuance in the first half of 2012 are real, but I think there were more mechanistic factors in the bond and sukuk markets that played a larger role in the surge of issuance in the first half.  Most of the sukuk issued in the region are issued with a 5-year tenor and I would suspect that most bonds are as well (since sukuk markets tend to take the lead from their conventional equivalent).  

The peak year in the global markets was 2007, which just happened to be 5 years ago, and was also near the peak for sukuk issuance in the GCC.  Since many issues were 5-year sukuk, they are coming due in 2012 (with a few maturing in 2013 if they were issued in the early months of 2008 before the financial crisis).  For the companies that issued these sukuk (if they are still around), 2012 is the year of the refinancing (highlighted so far by the failure of Arcapita to refinance a $1.1 billion murabaha in March).  To look to a conventional analogue, Investcorp recently announced that it was refinancing some of its debts due in 2013, likely to avoid running up to a the deadline lest an external financial event like the Euro crisis cause problems.

So, before we start attributing the surge in issuance to the good economy, need for infrastructure financing, and development of the institutional investment sector (while those may in fact be occurring), it is important to separate out the 'inevitable' refinancing activity from maturing bonds and sukuk from the previous peak.  If there is still a surge of activity, it will be more correctly attributed to the positive factors that will lead to sustainable growth in issuance as companies (in particular) move away from bank financing for the bulk of their debt issuance.