The resurgence in sukuk issuance since the twin shock of the global financial crisis and the Dubai debt crisis has been nothing short of remarkable. One of the most surprising indicators of how much demand for sukuk has rebounded is that the Dubai sovereign sukuk--issued by the very sovereign that was at the center of a storm in December 2009--has seen its yield drop from 6.396% when it was issued to just 3.2% yesterday. There have been a few hiccups in the 'year of the refinance' (notably with Arcapita's $1.1 billion syndicated murabaha), but many new sukuk have been issued, including the largest sukuk in history, the $4 billion Qatari sovereign sukuk which priced to yield 2.1% which reportedly left enough buyers out that they flooded the secondary markets, bidding prices up.
The development of the Islamic repo market (as nascent as it may be) has likely also encouraged a few extra buyers for sukuk, since they can realize some liquidity from their sukuk holdings through Islamic repo that allows them to hold onto that sukuk. This is true in particular for investment-grade sukuk like Qatar's sovereign sukuk. At the same time, reports suggest Western investors are becoming interested again with sukuk, through both primary and secondary markets.
This is a good thing. More demand and better secondary market liquidity will help bring new issuers into the market to provide more supply to meet the demand, which is clearly growing. However, the rapidity with which the market has boomed should be a cause for some concern. There will undoubtedly be a break in trading activity once Ramadan begins, but after the Eid, will there continue to be the same confluence of financial market conditions to support the prices for sukuk?
Will Western investors return to Europe if there is a pathway to a solution of the Eurozone debt crisis? Will there be geopolitical tensions in the GCC that affect local investment demand in sukuk versus 'safe' assets like US Treasuries (since not all investments from that region are dedicated entirely to Shari'ah-compliant investment strategies)? These are always concerns for the market, but when it has risen as quickly as it has recently, the risk of something happening that spooks an already relatively illiquid market rise.
In the long-run, sukuk markets are likely to continue to grow as Islamic finance increases its share of the financial markets in the GCC, but that does not mean the growth will occur along a straight line. There will be rough patches (hopefully not as challenging as the last five years), but the demand for sukuk is robust and the more mature that market becomes, the more it is likely to attract new potential investors and issuers.
Showing posts with label eurozone crisis. Show all posts
Showing posts with label eurozone crisis. Show all posts
Wednesday, July 18, 2012
Tuesday, November 29, 2011
German bond auction failure could not be 'cured' with sukuk
An Arab News article from Mushtak Parker begins:
The story of Germany's 2 billion euro auction, where 35% of the issue was not subscribed would not have been any different if it had been a euro-sukuk. There is nothing special about Islamic finance or sukuk that make it more likely for investors to buy a sukuk from an issuer than they would a conventional bond because, when the economic structure of the transactions are examined, there is not much difference between sukuk and conventional bonds. The only caveat to this statement is that some investors are constrained to only invest in Shari'ah-compliant instruments, but those buyers make up a relatively small portion of the total funds available to purchase in the primary markets.
The idea that Islamic finance can run to the rescue where conventional finance 'fails' is just as silly an idea as the idea that was all too common 3 or 4 years ago when people asserted without justification, that Islamic finance was 'immune' to the crisis. This proved false, and it is equally as false to say that if Germany had gone with a sukuk instead of conventional debt it would have filled the full offering of its bonds.
Right now, Islamic finance does not offer a different product, it just is in a different form. Sukuk are economically identical in most cases to conventional bonds, in order to re-structure the bond into a trade-based form. This is not a value judgment on sukuk; they are in demand and are giving some companies new capital markets they can tap, but they do not change the underlying economics of the transaction. In Germany's case, the bond issue failure was not a question of demand for German debt--if it were, the yields on bunds would have spiked (they haven't). It was likely an isolated incident reflecting general debt market stress within the Eurozone.
Bringing a sukuk instead of a bond does not change the underlying situation in Europe and, if anything, would probably lead to lower demand for the bonds because of the difficulty of educating investors on how sukuk work. Regardless of the issuer, however, it is unlikely that an issuer of any kind could bring a 10-year, 2 billion euro ($2.7 billion) sukuk to market.
The resilience of the sukuk markets during the eurozone crisis has more to do with the relative absence of direct exposure to Europe, where there are very few issuers, and is a reflection of the continued strengths of the GCC and other emerging and frontier markets where the economies are still (for the moment) strong. In addition, a high oil price keeps the liquidity flowing in these regions giving investors the capital needed to invest in sukuk. If the oil price slips because of the euro crisis and developed markets' economies (and/or China) slip, it is highly unlikely that the sukuk train will keep on rolling.
We have seen the connections in the global financial markets and how financial market disturbances in markets disconnected from Islamic finance can spill over into Islamic finance through slower economic growth. This was the story in 2007/08 when the subprime mortgage crisis in the US led to financial markets freezing up and a widespread economic downturn leading to a near-collapse in the sukuk markets. It is a waste of time to try and promote the idea that Islamic finance is somehow a panacea to all the financial market ills.
"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.
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."
The story of Germany's 2 billion euro auction, where 35% of the issue was not subscribed would not have been any different if it had been a euro-sukuk. There is nothing special about Islamic finance or sukuk that make it more likely for investors to buy a sukuk from an issuer than they would a conventional bond because, when the economic structure of the transactions are examined, there is not much difference between sukuk and conventional bonds. The only caveat to this statement is that some investors are constrained to only invest in Shari'ah-compliant instruments, but those buyers make up a relatively small portion of the total funds available to purchase in the primary markets.
The idea that Islamic finance can run to the rescue where conventional finance 'fails' is just as silly an idea as the idea that was all too common 3 or 4 years ago when people asserted without justification, that Islamic finance was 'immune' to the crisis. This proved false, and it is equally as false to say that if Germany had gone with a sukuk instead of conventional debt it would have filled the full offering of its bonds.
Right now, Islamic finance does not offer a different product, it just is in a different form. Sukuk are economically identical in most cases to conventional bonds, in order to re-structure the bond into a trade-based form. This is not a value judgment on sukuk; they are in demand and are giving some companies new capital markets they can tap, but they do not change the underlying economics of the transaction. In Germany's case, the bond issue failure was not a question of demand for German debt--if it were, the yields on bunds would have spiked (they haven't). It was likely an isolated incident reflecting general debt market stress within the Eurozone.
Bringing a sukuk instead of a bond does not change the underlying situation in Europe and, if anything, would probably lead to lower demand for the bonds because of the difficulty of educating investors on how sukuk work. Regardless of the issuer, however, it is unlikely that an issuer of any kind could bring a 10-year, 2 billion euro ($2.7 billion) sukuk to market.
The resilience of the sukuk markets during the eurozone crisis has more to do with the relative absence of direct exposure to Europe, where there are very few issuers, and is a reflection of the continued strengths of the GCC and other emerging and frontier markets where the economies are still (for the moment) strong. In addition, a high oil price keeps the liquidity flowing in these regions giving investors the capital needed to invest in sukuk. If the oil price slips because of the euro crisis and developed markets' economies (and/or China) slip, it is highly unlikely that the sukuk train will keep on rolling.
We have seen the connections in the global financial markets and how financial market disturbances in markets disconnected from Islamic finance can spill over into Islamic finance through slower economic growth. This was the story in 2007/08 when the subprime mortgage crisis in the US led to financial markets freezing up and a widespread economic downturn leading to a near-collapse in the sukuk markets. It is a waste of time to try and promote the idea that Islamic finance is somehow a panacea to all the financial market ills.
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