now loading...
Wealth Asia Connect Middle East Treasury & Capital Markets Europe ESG Forum TechTalk
Infra projects, refinancing to drive sukuk market
Competitive pricing offered by Malysia's ringgit sukuk market has been attracting a number of first time Middle East issuers. But recent successful issuances indicate that a healthy pipeline of issues out of the Middle East is coming to the market as well
Chito Santiago 1 Jun 2011
 
Ali: Healthy pipeline of sukuk issues out of the Middle East  

With the resurgence of investor confidence and the buoyant performance of financial markets in 2010, activity in the sukuk market has regained momentum. So far, the market is riding out the political storm in the Middle East and parts of North Africa. This is likely because, with the exception of Bahrain, the crisis is playing out in countries with virtually no Islamic finance activities – Syria, Yemen, Egypt and Libya.

 

According to a Standard & Poor’s (S&P) report issued on March 1 this year, over US$16 billion of sukuk had already been issued since the start of the year. Issuance reached a record high of US$51.2 billion in 2010, including those issued and matured that same year, exceeding the previous peak in 2007 by 34%.

 

It expects local currencies, most notably the Malaysian ringgit, to remain the currencies of choice. US dollar-denominated sukuk accounted for only 8% of the sukuk issued in 2010 and no significant change is expected in 2011, says S&P credit analyst Paul-Henri Pruvost.

 

Indeed, a number of market participants are looking forward to a strong sukuk market in 2011. “This year will be better in terms of sukuk issuance than in 2007 when we had a record amount of issue,” adds Badlisyah Abdul Ghani, CEO of CIMB Islamic Bank.

 

“This will be underpinned by the huge infrastructure development requirements in Southeast Asia and in the Middle East, which will require a lot of financing. And with the unrest in the Middle East, a large volume of the Islamic funding exercise will be done in the Malaysian sukuk market.” Malaysia, according to Pruvost, accounted for 78% of the sukuk issuance in 2010.

 

The Asian Development Institute estimates that Asia will need US$8.2 trillion in infrastructure investment between 2010 and 2020. In June 2009, the Asian Development Bank (ADB) and the Islamic Development Bank (IDB) jointly set up a US$500 million Islamic Infrastructure Fund to make Shariah-compliant equity investments in 12 borrowing member-countries of the ADB. This is Asia’s first major Islamic infrastructure fund and the investment represented ADB’s first Shariah-compliant fund.

 

“The Malaysian government has announced many large-scale infrastructure projects under the public-private participation scheme under its Economic Transformation Programme and many of the financing requirements would be done in Islamic structures,” says Mohd Effendi Abdullah, director and head of Islamic markets at AmInvestment Bank. “We have a lot of Islamic liquidity in the market.”

 

Yousuf Al-Jadia, director for strategic development at Qatar Financial Centre Authority, notes that infrastructure development across the Middle East and North Africa is estimated at US$1.2 trillion. “The strong economic development is contributing to an increasing appetite regionally for more sophisticated financial products and services, and Islamic finance plays an important role within that mix,” he adds.

 

Pricing, investor appetite top issues

 

 
  Haneef: Better appreciation of GCC risk

Rafe Haneef, CEO of HSBC Amanah Malaysia, likewise expects a busy year for the Malaysian ringgit sukuk market. “As the Middle East is going through a slowdown this year due to political problems, we are looking at the sukuk issuances in Malaysia and we are gearing up our presence in other markets as well,” he says.

 

“We are trying to bring the Middle East issuers to tap the ringgit market. The Malaysian investors have a better appreciation of the risks of the Gulf Cooperation Council (GCC) countries, so the pricing for them would be competitive in Malaysia as compared with the other markets.”

 

As bankers point out, the competitive pricing in the ringgit sukuk market is the driver for the Middle East issuers to tap this market and not the turmoil in the region. “The overall cost of funding is competitive in Malaysia compared with the US dollar issuance, and the swap market is favourable to them right now,” remarks Ahsan Ali, managing director and head of Islamic origination at Standard Chartered Bank. “The Malaysian market also understands the Middle East credits because there is a free flow of information between the two regions.

 

The Middle East issuers want to diversify their funding sources and investor base so that if the US dollar market is not open to them at a certain point in time, they can always tap the ringgit market.”

 

Haneef says having different standards is not a critical issue in the sukuk market, although he notes there is a lot more convergence now between the Malaysian and the Middle Eastern standards. “The issue is more of pricing and the investor appetite, as opposed to structure,” he adds. “We have come across a lot of common structures between Malaysian and Middle East transactions, but whether the Middle East issuers would tap the market in Malaysia or the Middle East investors would buy Malaysian paper all boils down to pricing and risk, similar to the conventional fund raising exercise.”

 

Meanwhile, the recent successful issuances out of the Middle East bode well for this year’s sukuk volume. “A couple of months back, some issuers had delayed their plans to issue their sukuk as global investors had adopted a wait-and-watch attitude given the uncertainties in the Middle East,” notes Ali. “However, the issuances of IDB and Sharjah Islamic Bank (SIB) have encouraged other issuers that are waiting on the sidelines to fast-track their issuance plans. As such, we see a healthy pipeline of issues out of the Middle East coming to the market in the next few months.”

 

Ali says the tremendous success of the SIB sukuk, which was nine times oversubscribed and generated an order book of US$3.7 billion, compared with the issue size of US$400 million, was an eye-opener to many market players. “This proved the ample Islamic liquidity and the pent-up demand for sukuk among investors,” he adds. The SIB deal was arranged by HSBC and Standard Chartered Saadiq, while the US$750 million IDB deal was arranged by BNP Paribas, Deutsche Bank, HSBC and Standard Chartered Saadiq.

 

Significant cross-border flows

 

As Bank Negara Malaysia Governor Zeti Akhtar Aziz points out, the sukuk market has evolved as a major contributing factor in driving the internationalization of Islamic finance. “It has become an important avenue for international fund-raising and investment activities, generating significant cross-border flows,” she told the 8th Islamic Financial Services Board Summit in Luxembourg in May.

 

This is exactly what’s happening in the Malaysian ringgit sukuk market, which gained ground in 2010, with a number of Middle Eastern issuers using it as a funding avenue for the first time to diversify their investor base. In June 2010, the National Bank of Abu Dhabi (NBAD) issued its first ringgit sukuk amounting to 500 million ringgit (US$166.67 million), which was oversubscribed by nearly four times following a strong investor demand. The five-year deal, which was also NBAD’s first sukuk offering, was such a success that it prompted the bank to come back to the market and launch its second ringgit sukuk in December for another 500 million ringgit.

 

This year, the Kuwait-based Gulf Investment Corporation (GIC) joined the fray and tapped the ringgit sukuk for the first time with a 600 million ringgit issue in February. The deal, which was upsized from the initial amount of 500 million ringgit due to brisk market response, represented the inaugural issue from GIC’s 3.5 billion ringgit sukuk medium-term note programme. GIC had tapped the Malaysian ringgit bond market before in February 2008, but it was in the form of a conventional offering in dual tranches amounting to one billion ringgit.

 

The ringgit sukuk market got a major boost from the 2011 budget when the government proposed that the expenses for the issuance of Islamic securities which adopt the principles of murabaha or bai bithaman ajil based on tawarruq (tripartite arrangement) be given a tax deduction. Designed to maintain the competitiveness of the sukuk market, this incentive will start from year of assessment 2011 until 2015 and will benefit the sukuk issuers that use any commodity-trading platform in facilitating the sukuk issuance.

 

The government says the new incentives will strengthen Malaysia’s position as the leading sukuk market and promote transactions in Bursa Suq al-Sila, the world’s first Shariah-compliant commodity trading platform.

 

Bursa Suq al-Sila gained notable plaudits last year as it managed to tap into the larger Islamic banks in the GCC market with the participation of Al Rajhi Bank and Alinma Bank, both of Saudi Arabia. The process took about a year as Bursa Malaysia had to undergo a rigorous Shariah review. It was not so much in terms of due diligence on the exchange, but more on the Shariah element of the trade mechanism, whether or not it satisfied the GCC banks’ Shariah councils.

 

 
Al-Jaida: Increasing appetite for sophisticated products and services  

It was a feather in the cap for Bursa Malaysia considering that the Al Rajhi and Alinma’s Shariah standards are among the most conservative in the world and their entry is a major step in enhancing recognition for Bursa Suq al-Sila.

 

One of the platform’s main selling points is the protection of Shariah integrity as it introduced the element of Shariah audit, or Shariah policing, which does not exist anywhere. This is a major draw specifically for the Saudi banks.

 

The Bursa Suq al-Sila also addressed the issue of risk mitigation from the treasury perspective. In the past, when one trades in commodities, the individual deals with the commodity brokers and thus takes on their risks.

 

In this case, Bursa Malaysia stands as the counterparty to the trade, so the individual takes the counterparty risk of the exchange, and this highly mitigates the risk.


Local currency issuances

 

In another initiative contained in the 2011 budget, the government has asked Bursa Malaysia to facilitate retail access to both the conventional bond and the sukuk markets since they are predominantly focussed on institutions. This is designed to meet the retail investors’ demand for fixed income instruments.

 

Malaysia, though, does not have the monopoly of sukuk issuances. “One of the trends that we are seeing is the activity in the domestic currency sukuk market,” says Ali. “There is an increasing activity in the Saudi riyal (SAR) sukuk market, although this market right now is open only to local issuers and to government-linked agencies and to good quality credits. This is a new market that has been developing only in the past two to three years.”

 

There had been sukuk issuances as well in dirham in 2007 and in 2008 when the US dollar bond market was closed in the wake of the financial crisis and in February this year, Aldar Properties issued a 3.5 billion dirham (US$953 million) convertible bond offering maturing in December 2013. There were issuances in Qatari riyal as well, with the government establishing a benchmark in this currency, according to Ali.

 

Pakistan likewise continues to churn out rupee sukuk and the fund managers are urging the government to raise its offering of Islamic debt to finance its budget deficit for them to have investment outlets to put their cash. The State Bank of Pakistan sold 45.80 billion Pakistani rupees (US$532.59 million) worth of three-year ijara sukuk in an auction held in May, in which it received bids amounting to 51.25 billion rupees.

 

From the corporate side, last year saw some interesting transactions, including the three billion rupee (US$34.88 million) musharaka facility for Sui Southern Gas Company, the largest private sector Islamic financing executed in Pakistan in 2010, and the 934.59 million rupee deal for Liberty Power Tech.

 

Last year, there were fewer Reg S/144A sukuk issuances and one of the reasons, according to Ali, was the Dubai World story and the high-profile news about the debt restructurings in the Middle East, which affected market sentiment.

 

Secondly, there were less funding requirements from the corporates because there were sufficient borrowings done in the previous years and they had no funding needs for investments. At the same time, there were no refinancing requirements yet. “The regular issuers were busy managing their balance sheet and their liquidity as they consolidate their activity,” says Ali. “But there are a lot of refinancing transactions now in the pipeline and so you will see issuances coming out this year and in 2012.”


In fact, Malaysia is planning to tap the sukuk market again this year to refinance a conventional bond issue and has reportedly given the mandate to four banks – CIMB, Citi, HSBC and Maybank. This follows the sovereign sukuk offering of US$1.25 billion in May 2010, its first after a lapse of eight years.

Conversation
Ying Bai
Ying Bai
ESG lead, Greater China
FTSE Russell
- JOINED THE EVENT -
7th Taiwan Investment Summit - Webinar Series 2021
Transitioning to a green future
View Highlights
Conversation
Paul Maley
Paul Maley
global head of securities services
Deutsche Bank
- JOINED THE EVENT -
In-person roundtable
Securing the future
View Highlights