Sukuk issuance growth to remain ‘unspectacular’ on structural constraints, Fitch says

The Arabian Gulf, whose funding needs are likely to fall if oil prices stay high, drove issuances in first quarter

Saudi Arabia has rolled out 142 stimulus initiatives with a total value of 214 billion Saudi riyals to support individuals, private sector businesses and investors since the outbreak of coronavirus. ReutersShow less

The moderate growth in sukuk issuances in the first quarter underpins continued investor interest, but it also points out to structural constraints, inhibiting faster uptake of Islamic bonds as an asset class, according to Fitch Ratings.

The total volume of sukuk rated by Fitch for the three-month period through to March end, stood at $80 billion (Dh294bn), a 6 per cent rise from the figures recorded at the of 2017, the rating agency said in a report released on Tuesday. New sukuk issuance with a maturity of more than 18 months from the Arabian Gulf states, Malaysia, Indonesia, Turkey and Pakistan came in at $14.9bn for the first quarter of 2018, a modest 1 per cent year-on-year rise.

“Seasonal patterns will affect quarterly issuance, which may pick up in the second half of the year following Ramadan and the summer break,” Fitch noted. “If the first quarter rates of growth are broadly maintained over the course of 2018, the annual increase in outstanding volumes would be broadly consistent with that seen in recent years.”

The issuances during the first quarter of 2018 were largely driven by the GCC region, whose funding needs are likely to fall if oil prices stay high. The sovereigns, though, may choose to issue more Islamic bonds as part of their efforts to deepen their local debt markets and diversify funding sources for themselves and the corporate borrowers in the region.

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Corporate borrowers, financial institutions, government related entities and sovereigns in the region have increasingly looked at tapping the sukuk market for their funding needs in the recent quarter and more are lined up to test the markets this year.

Saudi Arabia, the region’s biggest economy and the world’s top oil exporter, is poised to raise funds by selling sharia-compliant bonds as soon as the market conditions allow, Reuters cited the head of kingdom’s Debt Management Office Fahad Al Saif as saying in March. The kingdom last year raised $9bn through sovereign sukuk issuances.

Issuer funding needs and investor appetite for the remainder of the year will, however, be determined by factors including oil prices and tighter global financing conditions. Investor sentiment may also be vulnerable to geo-political tensions in the Middle East and the pace of US monetary policy tightening, according to Fitch.

Although Islamic bond issuances remain on upward trajectory, standardisation in the industry remains a significant challenge, which has crimped the rate of expansion for sukuk as an asset class, Fitch noted.

“We think that structural constraints mean growth may be steady but

unspectacular,” it said. “Greater standardisation …. would help sukuk gain wider acceptance among international investors, especially if it helped set out rights and obligations in all circumstances.”

The challenges facing sukuk as an asset class, which include the potential for variations in interpretation of sharia principals and a lack of legal precedent, were highlighted by Sharjah energy firm Dana Gas's attempt to have its mudaraba sukuk declared unlawful on the grounds that it is not sharia-compliant, Fitch said.

The company earlier this month said it had reached an agreement with the ad-hoc committee of sukukholders on a restructuring and refinancing offer for its $700 million sukuk, subject to the consent of shareholders and sukukholders.