Blog Archives

Sovereign Issuance was a Challenge – South Africa Debt Director

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South Africa’s debut sukuk was “very tough” stated Tshepiso Moahloli in an interview with Global Financial Conferences, Director of Debt Issuance and Management for the National Treasury Republic of South Africa.

The biggest challenge was understanding the sukuk product and the nuances of the market, as well as asset identification.

She also stated the issuance was motivated by the desire to diversify funding sources, and the investor base as well as to set a benchmark for domestic corporates looking to fund infrastructure projects, and was hopeful state owned companies would follow through with issuances.

South Africa issued its debut sukuk in 2014, a US$500M sukuk which was more than 4 times oversubscribed with an order book of US$2.2 billion. The South African Treasury has previously stated it may make further sukuk issuances in 2016.

Sukuk are not Bonds

Sukuk tend to reply upon underlying assets which are securitised which must meet Sharia guidelines based on religious and ethical requirements. Further challenges arise due to the transfer of assets and associated tax liabilities due to the securitised sale and sell back.

Bonds on the other hand, can be created with the click of a button and tend to supported based on the credit risk rating of the issuer, as opposed to any underlying asset.

Japan is right to seek sukuk success

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Mohammed Dawood – Japan’s Financial Services Agency is right to promote the growth of its Shariah-compliant finance sector.

Japan’s Financial Services Agency has given the green light for banks to move into Islamic financing.

The Japanese supervisory body has allowed banks under its watch to engage in so-called Islamic finance at their overseas branches starting this month. It was previously allowed only at their subsidiaries.

Acting early will further secure Japan’s rightful place as a leading financial market in a fast evolving global system. It will also strengthen links with the Middle East and Southeast Asia — two of Japan’s fastest growing export markets.

Read Full article here.

By Mohammed Dawood is global head of Sukuk Financing at HSBC Bank Middle East and has worked in Islamic finance for the past 15 years.

IILM Issues 3 Month Sukuk – Sukuk Orderbook Sinks

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IILM Sukuk tend to be more than twice oversubscribed; the weak order book on this issuance is likely down to this weeks large dual Sovereign sukuk issued by Government of Malaysia.

Malaysia issued a 10 year and 30 year sukuk this week which absorbed much liquidity from the market hence the drop off in the IILM sukuk which are rated higher than that issued by Malaysia.

Sukuk rated A-1 by Standard and Poor’s Rating Services (S&P’s) has been issued by the International Islamic Liquidity Management (IILM). The previously announced $860M issuance received orders of $1.11 Billion and were issued at a profit rate of 0.566% with a maturity date of 15 July 2015.

The IILM is an international institution established by central banks, monetary agencies and multilateral organisations to introduce and facilitate effective cross-border Shari’ah-compliant liquidity management.

IILM sells its Sukuk through its primary dealers, who consist of: Abu Dhabi Islamic Bank, AlBaraka Turk, CIMB Islamic Bank Bhd, Luxembourg’s KBL Private Bankers, Kuwait Finance House, Maybank Islamic Bhd, National Bank of Abu Dhabi, Qatar National Bank, Standard Chartered Bank and Barwa Bank.

Up to $120 billion Sukuk Likely to Issued in 2015

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In a research note, RAM Rating stated new global sukuk issuance to remain fairly resilient in 2015, at around USD100 billion to USD120 billion (2014: USD116.23 billion), despite the challenging environment for Malaysia and the GCC amid the steep fall in global oil prices since last year.

GCC Issuers May Delay Till H2 2015

GCC sukuk issuers that typically tap the international markets could well delay their plans to the second half of 2015, until the full impact of soft oil prices and the possible effects on their credit standing can be digested by potential investors. Geopolitical risks in the GCC, Europe’s quantitative-easing programme and the much-touted rate increase by the US Federal Reserve this year have compounded the uncertainties for GCC sukuk issuers and their potential investors.

Ringgit Sukuk

Although ringgit-denominated sukuk issuance was rather slow off the block this year, issues from the infrastructure sector and financial institutions as well as some supply of Islamic securities from Bank Negara Malaysia are expected to keep Malaysia in the lead, with about 60-70% of the global sukuk market’s issuances. The stability of the sukuk market is also underpinned by sturdy demand from Islamic and conventional ringgit-mandated domestic institutional funds as well as Malaysian-domiciled Islamic banks that are less likely to be perturbed by external shocks.

”Beyond leading the global sukuk market, innovation is also Malaysia’s forte,” highlights Promod Dass, Deputy CEO of RAM Ratings. The Securities Commission Malaysia’s Sustainable and Responsible Investment (SRI) sukuk framework – launched in August 2014 – has allowed Malaysia to keep exploring new frontiers. ”Khazanah Nasional Berhad’s plans for an upcoming SRI sukuk will be another milestone for Malaysia in this arena,” adds Promod.

Sharia Standards

Meanwhile, issues involving Sharia interpretation, the standardisation of documentation, tax treatment and the still-developing legal and regulatory frameworks to support sukuk in different jurisdictions form part of the slew of hurdles that global issuers and investors alike have to contend with, when deciding between sukuk and conventional bonds. These factors tend to segmentalise the global sukuk market and limit the pace of cross-border issuance. As such, accelerating and orchestrating the global sukuk market’s growth would be a complex task, although some parts of the formula for success are already evident in the Malaysian sukuk and bond market.

Notably, the Malaysian sukuk market has played host to many well-known GCC-based issuers, which have been raising ringgit-denominated sukuk since 2008. This highlights how regulatory drive as well as a supportive legal and tax environment in a particular market can foster cross-border sukuk growth. ”Perhaps the next leap for global sukuk will materialise when GCC sovereign wealth funds, which are among the world’s largest, reallocate more of their portfolios to invest in sukuk from Asia, Europe, the US and other non-OIC nations. Issuers from non-OIC nations that typically do not opt for sukuk could then be more convinced to explore this route for funding diversity, once they see this seismic shift.” observes Promod.

Sukuk Updates – Rasameel GCC Market Update March 2015

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Sukuk issuances in March 2015 surged in terms of both value and number.

By value soared 55% y-o-y to USD2.6bn. For YTD March 2015 Sukuk issuance by value declined 39% y-o y to USD4.8bn, mainly driven by a sharp decline in sovereign (-60% y-o-y), quasi sovereign issuances (-33%) and corporate issuances (-15%). Corporates comprised 50% of the total issuance volume for YTD March 2015, followed by sovereign at 29% and quasi-sovereign issuances at 21%.

Download Rasameel GCC Market Update March 2015.

IILM to Issue $860m 3 month Sukuk

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The Kuala Lumpur based International Islamic Liquidity Management (IILM) announced it intends to issue an $860m 3 month sukuk on 16 April 2015.
The IILM is an international institution established by central banks, monetary agencies and multilateral organisations to introduce and facilitate effective cross-border Shari’ah-compliant liquidity management.

The IILM seeks to facilitate cross-border liquidity management among institutions offering Islamic financial services by making available a variety of Shari’ah-compliant instruments, on commercial terms, to suit the varying liquidity needs of these institutions.

IILM sells its Sukuk through its primary dealers, who consist of: Abu Dhabi Islamic Bank, AlBaraka Turk, CIMB Islamic Bank Bhd, Luxembourg’s KBL Private Bankers, Kuwait Finance House, Maybank Islamic Bhd, National Bank of Abu Dhabi, Qatar National Bank, Standard Chartered Bank and Barwa Bank.

Updated 1: Indonesia government issues regular sukuk

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The Government of Indonesia conducted a regular sukuk auction last week and
absorbed IDR1.98 trillion from incoming bid amounting IDR3.25 trillion,
slightly lower than indicative target of IDR2 trillion. Average weighted
yields were 18 bps higher for 6-months T-bills but 4 bps lower for PBS07
(maturing in 2040) respectively than prior auction result dated on 10
March. Government also issued IDR2.7 trillion PBS06 by private
placement to Indonesia Deposit Insurance Corporation. At this moment,
the government has issued a total of IDR170.16 trillion year-to-date out
of annual gross target of IDR452 trillion (budget revision).

Download full details here.

RAK orderbook down from previous sukuk as airline crash impacts Emirates sukuk

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Ras Al Khaimah Sukuk

This is Ras Al Khaimah’s first sukuk issuance since October 2013, when the UAE emirate of Ras Al Khaimah sukuk was priced at 3.297% (MS+175bps) with a total of USD500m which garnered orders over USD5bn, which represents much stronger demand than the currently launched 10y sukuk.

Emirates Sukuk

Also launching this week was the Emirates airlines sukuk which is to fund the orders for A380-800, as Emirates seeks USD107.5bn worth of aircrafts from Boeing and Airbus. This is the first time for UK Export Finance (UKEF) to guarantee a sukuk.

This weeks Germanwings crash as well as subdued demand, intense competition (from low cost carriers), and overcapacity issues may dampening market’s sentiment for the airline sector.

Reproduced with permission from RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia

Unrest in the Middle East limits sukuk gains over the week

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In a research note, RHB Research reported the Bloomberg Sukuk Market Return Index (BMSSUTR) rose marginally 0.07% W-o-W (vs. +0.13% in week prior) to 119.71, bringing YTD return to 1.23% (vs. 1.23% in week prior). The Dow Jones Sukuk Total Return Index (DJSUKTXR) rose 0.06% W-o-W (vs. +0.24% in week prior) to 154.87, with YTD returns to 1.56% (vs. 1.50% in week prior).

The expanding Yemen civil war and Iran’s disputes with UN added geopolitical risk premiums back to oil (Brent +8.7% W-o-W to USD59.2/bbl) and the Middle East markets, overall reversing sukuk gains out of FOMC’s dovishness last week. Similarly, 10y UST ended at 1.99%, returning to last week’s levels after touching 1-month lows of 1.87% on Tuesday. The top 5 gainers in the BMSSUTR during the week were QATAR 23, SECO 22, ISDB 19, SECO 24 and SECO 23 adding market value by USD3.1bn.

DJ Sukuk Total Return vs. Bloomberg Sukuk Index[/caption]

UAE Shariah Board Reforms

Sukuk primary market should be supported as UAE forms federal Shariah Board by 3Q15, where the board will assess standards of Islamic financial products; whether it conforms with Islamic creeds. As a comparison, Malaysia established its board in 1997, therefore we think the Sharia Board formation is overdue, but is a positive step towards building confidence in sukuk products and should support sukuk issuance toward end of 2H15. Nevertheless, it still depends on the US Fed rate hike decision. Risks loom in the region, where Saudi Arabia led air strikes in Yemen and pressured oil prices by c. 9% W-o-W (week prior -5%) to USD59/bbl.

Source: RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia

Moody’s affirms Pakistan Sukuk Rating whilst revising outlook for foreign currency government bond rating to positive

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Moody’s affirms Pakistan US dollar Trust Certificates issued by The Second Pakistan International Sukuk Company Limited with Caa1 rating, whilst revising the outlook on Pakistan’s foreign currency government bond rating to positive from stable.

A stronger external liquidity position

Net foreign reserves with the State Bank of Pakistan climbed to $11.2 billion as of 13 March 2015, from $3.2 billion at the end of January 2014. The cushion provided by foreign reserves coupled with dwindling external debt repayments to the IMF has reduced external vulnerabilities. This has in large part resulted from a lower current account deficit, which was easily financed by the issuance of a Eurobond in April 2014, a Sukuk issuance in December, continued disbursements under the IMF program, and privatization proceeds.

Efforts towards fiscal consolidation

The government has relied on the banking system for deficit financing, but such borrowing is gradually declining as privatization proceeds, and the Eurobond and Sukuk issuances, have helped it to diversify funding. Moreover, the maturity of domestic public debt is lengthening as the government substitutes shorter-term treasury bills with Pakistan Investment Bonds that carry a longer tenure. This will reduce roll-over risks and volatility in debt issuance prices.