Market Report | Global Islamic Finance

Author: Anita Hawser
Bajwa, Noor Bank: Middle Eastern sukuk investors...should look for a decent proportion of their holdings outside of the region.

Sukuk is not a viable option for all issuers, particularly those that conduct their business in non-shariah-compliant activities such as alcohol or tobacco. “But a company with the right business model and size, that has a [shariah-] compliant business, whether they are a telecom, airline, real estate company, in oil and gas or even a sovereign issuer, could be genuine candidates for sukuk,” says Bajwa. “Issuers do, however, have to look at whether it makes sense commercially. If it doesn’t, they won’t do it unless they may have more strategic reasons.” Issuers also need to ensure the availability of sufficient unencumbered assets to structure a sukuk.

Malaysia is still the biggest market by value and volume for local-currency sukuk issuance. According to a Bloomberg report dated September 23, an issuance from Malaysia’s sovereign wealth fund will push its sukuk sales beyond 50 billion ringgit ($15.4 billion) for only the second time in 16 years.

“The Malaysian sukuk market over the years has witnessed many innovative and exciting initiatives, including issuances by foreign issuers from various jurisdictions,” says Maybank’s Isamail. “The robust regulatory framework and demand for sukuk provide both issuers and arrangers the platform to innovate in terms of the type of structure, the maturity profile of the instrument and also the format (for example, senior unsecured, subordinated capital sukuk and also exchangeable sukuk).”

Ismail says the innovation is not limited to the domestic market; the sovereign and Khazanah Nasional Berhad, Malaysia’s sovereign wealth fund, have issued what Ismail describes as highly innovative sukuk instruments in foreign currency targeting investors in various jurisdictions.

But when it comes to international sukuk, Abusneineh says the GCC leads, adding that of the total international sukuk volume so far this year, around 70% was issued from the GCC region.

One of the more notable sukuks to come out of the region was Saudi Electricity Company’s April 2013, dual-tranche, $2.5 billion sukuk, which was the world’s first international 30-year sukuk and one of the few to attract investor interest from onshore US accounts. “To take this legal structure to markets like the United States and get a 30-year issuance is quite groundbreaking,” states Atif Hanif, European Islamic finance chief for law firm Allen & Overy, which advised SEC on the deal. “They tend to be 10 years at the long end.”

As for the sukuk defaults mentioned earlier, these have largely been restructured. However, given that sukuk is still a fledgling market, there are some important lessons that can be gleaned from the events of five years ago.

When there is relatively high market volatility, generally sukuk outperform conventional bonds.

~ Fawaz Abusneineh, NBAD

Back then, Abusneineh says, investors weren’t fully aware of the difference between asset-based (unsecured) and asset-backed (secured) sukuk. Although assets are used to structure a sukuk, in the event of a default it is only holders of a secured sukuk that have recourse to the underlying assets. “There are sukuks which are secured,” says Abusneineh, “but they are not as prevalent as the usual capital market instruments, which are mainly unsecured. Investors now have a far better understanding of the various sukuk structures and risks.”

In the case of Nakheel, scholars say the main legal issues concerned the legal framework within the UAE rather than the Islamic structure used. In an interesting twist, Nakheel actually issued a sukuk to settle outstanding trade creditor claims, which, legal experts point out, was the first time a GCC company had used sukuk in this way.

“Sukuk are resilient and strong,” concludes Abusneineh. “When there is relatively high market volatility, generally sukuk outperform conventional bonds.”