After a sluggish start to the year the Middle East’s Islamic bond, or sukuk, market appears to be recovering, with yields tightening markedly since late March and several large fresh sales coming to the market this month.
The yield of HSBC-Nasdaq Dubai’s Gulf sukuk index has tightened to 4.56 per cent – the lowest level in almost six years – from more than 6 per cent at the beginning of March. Conventional bonds in the Gulf have also rallied, but still yield 4.95 per cent.
Renewed appetite has spurred several Gulf-based entities to return to the Islamic finance market.
This month the Islamic Development Bank issued a $750m sukuk, while Sharjah Islamic Bank sold $400m of Islamic bonds. Both issues were significantly oversubscribed, indicating the healthy demand for Islamic paper and reinforcing expectations that the market will continue to recover.
“These were great successes, and that breeds momentum,” says Afaq Khan, chief executive of Islamic banking at Standard Chartered. “There will now be other entities that consider selling sukuk. I’m very optimistic.”
HSBC Middle East, Saudi Electricity Company and Qatar International Islamic Bank have all said they plan to issue Islamic bonds this year. Bankers say other organisations are also considering sales.
More issuance will be a welcome boost to the market, which has seen the volume of Middle East Islamic bond sales shrink every year since 2007, to a miserly $5.1bn last year. This year, Middle East entities have sold only $1.9bn so far, an 18 per cent drop from the same period last year.
Yet Asia’s sukuk market has continued to thrive, led by Malaysia, arguably the Islamic financial industry’s leading centre.
The Malaysian government’s $444bn development plan has increased the sale of ringgit-denominated Islamic bonds by 51 per cent to M$12.4bn ($4bn) this year, according to Bloomberg data.
Slated sales by companies ranging from Poh Kong Holdings, a jewellery maker, to Ranhill Berhad, a builder, may drive Malaysian Islamic bond issuance to an all-time high this year, according to bankers.
One of the most intriguing sukuk sales, however, is likely to emerge in Dubai. Nakheel, the troubled property developer that played a pivotal role in the emirate’s debt woes, plans to offer a Dh4.8bn ($1.3bn) bond to its trade creditors by the end of June, local media report.
According to Nakheel’s restructuring agreement, contractors were to be repaid 40 per cent of their outstanding claims in cash, with the remaining 60 per cent in the form of a sukuk to be listed on Nasdaq Dubai, the emirate’s international exchange.
Trade creditors were paid Dh2.5bn last August, but the sukuk issuance has been delayed. With a sale now apparently imminent, many eyes will be on how it performs when it lists and trades freely.
Despite the rally, experts say the Islamic bond markets still labour with long-standing issues of sharia interpretation, structuring and enforceability in cases of default.
“Momentum will resume, but it’s too early to say that it will be now,” says Neil Miller, global head of Islamic finance at KPMG. “We still need more clarity on a lot of the issues that have cropped up in recent years.”
source: Financial Times