GCC sukuk sales on track to outperform traditional bond issues

Volumes of sukuk sales are likely to outperform conventional bond issuance in the GCC in the first quarter as record low yields and new rules raise their attraction for companies as a fundraising tool, says Standard & Poor’s

Across the longer term, Dubai's bid to create an Islamic finance centre will help to further underpin demand for Islamic bonds.

“We expect sukuk issuance in volume terms to remain above conventional bond issuance in the first quarter,” said Karim Nassif, a credit analyst in Dubai at S&P, the credit rating agency.

“The dynamic we see in the sukuk market is there’s not enough supply and a lot of demand. You have very high credit quality [in the region], so typically, when you get these corporates coming out of the UAE, Qatar and Saudi Arabia issuing a sukuk, there’s a lot of demand.”

In a sign of the steady pickup in investor appetite for sukuk, a US$300 million Islamic bond sale by Dubai Investments Park, a subsidiary of Dubai Investments, the diversified conglomerate, was last month more than 12 times oversubscribed. The same month, National Commercial Bank, Saudi Arabia’s largest lender, sold a 5 billion riyal (Dh4.89bn) sukuk, the largest transaction of its kind in the kingdom.

In a report released yesterday about corporate bond issues, S&P cited record lows on sukuk yields as one driver strengthening demand for Islamic finance. Yields – or how much investors require in return for buying a company’s debt – have been pushed down as global interest rates have stayed low in the aftermath of the global financial crisis.

S&P said caps introduced in the UAE limiting banks’ exposure to government-related entities was likely to encourage more companies to consider sukuk as an alternative funding source. The Central Bank has announced rules capping the amount a bank can lend to government and related entities at 100 per cent of its capital base.

Ongoing regulations to consider allowing perpetual sukuk to be treated as permanent equity in a company and bank balance sheets were a factor spurring new issues of perpetual sukuk, S&P said. Abu Dhabi Islamic Bank in November 2012 sold $1bn of the world's first hybrid perpetual Tier-1 sukuk, which can be treated as equity and used to supplement capital.

Total regional bond issuance rose from about US$55bn in 2012 to around $58bn last year, said Mr Nassif. The growth rate for sukuk sales was roughly double that of conventional bonds, he estimated.

S&P said it expected growth in overall issue volumes across capital markets to be “steady” this year compared to last year’s rate. Low yields could push up issuance, it added.

“Strong investor demand has allowed issuers to tap markets at record low coupon rates and extend debt maturity profiles. This has helped improve their financial credit profiles,” said Tommy Trask, S&P’s credit analyst in Dubai.

In a development viewed as key to further bolstering the sukuk market in the region, Dubai has moved to position itself as an Islamic finance centre. The Dubai Government has set a three-year timetable for the emirate to be the centre of the Muslim world economy and is setting up an Islamic economy centre to help reach the goal.

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