Anaylsis Markets

Global Sukuk Issuances Surged in 1H2014

In the first six months of the year, global primary sukuk issuances amounted to USD66.2bln, representing an 8.2% growth over 1H2013 when issuances totalled USD61.2bln.

By quarter, the 2Q2014 saw new issuances worth USD35.1bln,after recording USD31.14bln in 1Q2014. The sukuk issuances were driven mainly by traditional sukuk markets of Malaysia, Saudi Arabia, the United Arab Emirates and Turkey.

Amidst rising sukuk issuances, global sukuk outstanding has expanded by 6.3% in the first half of 2014, amounting to USD286.4bln (end-2013: USD269.4bln). In light of the fasting month of Ramadhan starting on 29 June 2014, the sukuk market experienced a rally in new issuances towards the end of 2Q14. For the quarter, total new sukuk issuances volume amounted to USD35.1bln (1Q14: USD31.1bln; 2Q13: USD26.7bln), representing the third highest quarterly issuance volume over the last two years since 2Q12. The previous highs were recorded in 4Q2013 (USD36.7bln) and 3Q2012 (36.7bln). Similar to previous quarters, a significant share of sukuk issuances in 2Q14 were spearheaded by the traditional Islamic finance hubs of the Gulf Cooperation Council (GCC) and Malaysia. Primary market issuances in Malaysia, the leading jurisdiction in sukuk issuances, increased to USD22.1bln in the 2Q14 (1Q14: USD19.6bln). Overall, total sukuk issuances in 1H2014stood at USD66.2bln,which is a significant increase of 8.2% compared to the same period in 2013 (1H2013: USD61.2bln).

Furthermore, the 1H2014 issuances are nearly equal the record issuances of USD66.4bln in 1H2012. The volumes in both 1Q and 2Q in 2014, in turn, have exceeded the quarterly average new sukuk issuances volume of USD30.7bln since 2Q12. By market share, Malaysia continues to be the leading jurisdiction accounting for 63% of the total global new sukuk issuances in 1H2014 (USD41.7bln). A total of 244 sukuk tranches were issued in 1H2014 by a wide range of corporate and non-corporate issuers in the Malaysian market. Excluding the sovereign and related entities, corporate issuances were mainly from the financial services, real estate and power and utilities sectors.

During the 2Q14, Malaysia’s largest takaful company (in terms of contributions) issued the world’s first takaful sukuk worth USD93.2mln. The issuance was a unique offering, as typically insurance companies and takaful operators are investors in bonds  and sukuk market instruments,while in this case a takaful company acted as an issuer.In addition, Malaysia’s AAA-rated entity KLCC REIT, issued one of the very few real estate and investment trust (REIT) sukuk raising MYR1.55bln through four tranches of different sizes, tenures and maturities. Elsewhere in the GCC market, which is the second largest sukuk market behind Malaysia, had witnessed a substantial increase with nearly USD10bln of new issuances in the 2Q14 (1Q14: USD7.8bln). Reflecting this momentum, the GCC sukuk market accounted for 26.7% or USD17.7bln of the total global new sukuk issuances in 1H2014 (1H2013: 23% or USD14.1bln). This strong growth was mainly attributable to the Saudi Arabian and the United Arab Emirates markets.

Sukuk issuers from Saudi Arabia raised more than USD5bln in proceeds during the 2Q14, shoring up Saudi 1H2014 issuances volume to over USD9.05bln (1H2013: USD7.48bln). Major issuances from Saudi Arabia amounting to more than USD1bln were by a multilateral Islamic bank, a commercial bank and national power and utilities company. Similarly, the United Arab Emirates issuances contributed USD3.35bln in the 2Q14, taking the 1H2014’s total value to USD3.65bln (1H2013: USD5.17bln). In the growing sukuk frontier of Turkey, sukuk issuances were led by three Turkish participation banks, out of a total of four in the industry, adding almost USD1.6bln in Turkish issuances during 2Q14 (1Q: USD658mln). Notably, one of these sukukswas issued in Malaysia denominated in Malaysian Ringgit, reflecting the strengths of the Malaysia market as a leading sukuk issuer.

On 30th June, a Turkish participation bank raised MYR800mln through a 5-year sukuk structured on a Murabahah contract. Overall, as of 1H2014, Turkish originated sukuk accounted for 3.41% or USD2.26bln of the global new issuances this year (1H2013: 2.95% or USD1.81bln).

Globally, a notable milestone was achieved in the sukuk market during the 2Q14. The United Kingdom issued its debut sovereign sukuk, making it the world’s first non-Organisation of Islamic Cooperation (OIC) country to issue sovereign sukuk, ahead of several other non-OIC countries that have expressed keen interest, such as Luxembourg, South Africa and Hong Kong. The highly anticipated British sovereign sukuk was sold to investors on 25thJune, raising GBP200mln (USD339.5mln) for the British Government while providing investors a profit rate of 2.036%. The issuance had attracted significant interest from a wide range of investors, reflecting the latent demand for sukuk globally. Order books totalled up to GBP2.3bln, which represents an over subscription by nearly 12 times the issuance size. In terms of investors, the sukuk attracted investments from sovereign wealth funds, central banks and domestic and international financial institutions.

The geographic allocations of the programme included domestic investors (39%), as well as investors from the Middle East (37%) and Asia (24%). Another significant development in the 2Q2014 was the strong rebound in corporate sector sukuks, reflecting increased optimism on global economic and financial stability. In terms of the type of issuers in the primary market, the corporate sukuk sector recorded a 66% quarter-on-quarter (q-o-q) increase in volume, with USD9.5bln worth of issuances in the 2Q14. This compares favourably with the rather subdued volume of USD5.7bln in the 1Q14. On the other hand, issuances by the sovereign sector remained broadly unchanged in the quarter. Sovereign issuances totalled USD25.4bln in the 2Q2014, which is a minor 0.45% increase compared to the 1Q14’s USD24.4bln volume.

Malaysia continues to stand out as the only sukuk market with global outstanding above USD100bln.

The increased activity in the corporate sukuk sector during 2Q14 was substantially contributed by issuers originating from Saudi Arabia, the United Arab Emirates and Turkey. Corporate sukuk issuers were particularly active in the run up to Ramadan in June, when these three markets alone issued USD4.4bln worth of corporate sukuk. During the 2Q14, the share of corporate sukuks in total issuances increased to 27.1%, compared to 18.4% in 1Q14. Overall, in 1H2014, the share of corporate sukuks amounted to USD15.2bln or 23% of the market (1H2013: USD15.6bln or 25.4%) while sovereign and government related entity sukuks amounted to USD50.97bln or 77% share of the market (1H2013: USD45.6bln or 74.6%). Looking further into sukuk issuances by sector, the government (2Q14: 56.7% market share; 1Q14: 59.5%) and while the financial services sectors (2Q14: 19.5% market share; 1Q14: 23.5%) continued to lead the market.

A notable inclusion among the 2Q14 issuances was a retail industry sukuk worth SAR500mln (USD133.3mln) which was issued by a fashion retailing conglomerate in Saudi Arabia. Overall in 1H2014, government issuers accounted for USD38.4bln or 58% of the total new sukuk issuances (2013: 62%) while the financial services sector accounted for USD14.2bln or 21.4% of the market (2013: 10%). Underpinned by growing interest by Islamic financial institutions in issuing sukuks, the share of sukuk issuances from the financial services sector has dramatically increased in 1H2014. Islamic banks are keen to tap the sukuk market to raise capitalisation funds, in order to comply with the Basel III standards of best practices that are being gradually implemented in most jurisdictions since January 2013.

During the month of June 2014, the first Basel III additional Tier 1 sukuk was issued by an Islamic bank in the UAE. In the same month, a total of four Basel III-compliant Tier 2 sukuks were issued by two banks each in Saudi Arabia and Malaysia. Another key sector in 1H2014 was the power and utility industry which accounted for USD5.8bln or 8.8% market share (2013: 9.4%), reflecting in part the importance of sukuks as a source of infrastructure financing. Analysing the currencies of sukuk, a total of 13 currencies were utilised in 1H2014, including the first GBP denominated sukuk in 2Q14, on account of the United Kingdom sovereign sukuk.

During the 2Q14, sukuks were issued mainly using respective local currencies, with a notable exception in the United Arab Emirates and Turkey where sukuks have been denominated in US Dollars and, in the case of one Turkish sukuk issued in Malaysia, in Malaysian Ringgits. In line with the high volume of issuances from Malaysia, the Malaysian Ringgit accounted for bulk of the issuances, representing 59.1% of the total market in 1H2014 (2013: 67.1%). The share of sukuks issued in US Dollars, the second most popular currency, increased to 18.9% in 1H2014 (2013: 15.02%), reflecting preferences by issuers in the GCC and now in Turkey for USD. Moreover, the increased issuance in US Dollar sukuk issuances was driven by multilaterals such as the Islamic Development Bank and the International Islamic Liquidity Management Corporation. Among the other notable currencies include QAR with a 6.2% share (2013: 1.0%), spearheaded by significant issuances of local currency sukuks by Qatar Central Bank. SAR had a 6.9% share (2013: 9.1%) on the back of local currency issuances by Saudi corporates and government-related entities.

Overall, the global sukuk outstanding market reached USD286.41bln as at 1H2014, a 6.3% expansion YTD from the USD269.4bln as at end-2013 and a 16.8% growth y-o-y since 1H2013. The outstanding volume has accelerated in the 2Q14, following a modest 1.3% growth in 1Q14. Malaysia continues to stand out as the only sukuk market with global outstanding above USD100bln. As at 1H2014, outstanding sukuk from Malaysia amounted to almost USD164bln, a 4% increase compared to the USD158.3bln outstanding amount as at end-2013. In contrast, the12 outstanding volume in the second largest sukuk market of the GCC totalled USD92.9bln in 1H2014, a 9% increase in value compared to the USD85.3bln outstanding as at end-2013.

The solid performance of the global sukuk market in 1H2014 has reinforced expectations that the annual new issuances volume this year is likelyto surpass last year’s USD119.7bln volume.

Despite economic uncertainties and other challenges in the global financial system at the start of this year, issuers have continued to tap the sukuk sector to raise liquidity, reflecting the viability of sukuks as a medium to raise financing. The increased issuances enabled the global primary market to outperform in 1H2014, as compared to the first half of last year. Notably, sukuk issuances have not been restricted in OIC countries as obligors’ based in the likes of Singapore, Luxembourg and most recently the British Government have also tapped the market in 1H2014. Furthermore, international multilateral bodies including the World Bank, the Asian Development Bank and the African Development Bank have recently re-iterated their commitments to Islamic finance this year and have ventured into exploring sukuk as options to manage global funding gaps. A number of efforts are being directed towards enabling sukuk to serve as viable tools to fund global liquidity needs, for example, to support Africa’s infrastructure development needs. Sukuks are utilised by a wide range of sectors and during 1H2014, with the world’s first takaful sukuk was issued in May.

There are more than 200 takaful operators domiciled mainly in Asia, Europe and Africa. Given the nascence ofthe takaful sector combined with efforts by various stakeholders to expand takaful and retakaful offerings in numerous jurisdictions, sukuks are a viable method to raise the necessary capital and liquidity required to support the sector’s growth and expansion. In this regard, the inaugural sukuk issuance by a takaful company has opened the doors to what could turn out to be a critical new growth sector that may further spur the issuances volume in the global sukuk market.

Another factor supporting growth and diversity in the sukuk market is the move towards greater Basel III compliance. This creates a new opportunity to innovate more ‘Basel III compliant’ sukuks, which can address the capital adequacy needs of Islamic banks. Basel III compliant sukuks are an alternative funding source for institutions that face difficulties in raising capital through equity issuances. As such, Basel III compliant sukuk are a viable instrument for both conventional and Islamic financial institutions, on the condition that funds are utilised for Shari’a-compliant activities. These innovations offer the potential for sukuk under writers to expand market shares and further boost the supply of sukuk in global markets.

In conclusion, the long-term trajectory of the global primary sukuk market remains intact, as issuers have continued to tap the market despite various macroeconomic challenges and uncertain financial conditions at the start of this year. The solid performance of the global sukuk market in 1H2014 has reinforced expectations that the annual new issuances volume this year is likely to surpass last year’s USD119.7bln volume. Importantly, the increase in overall sukuk issuances is expected to be complemented by more diverse issuance countries and currencies used. To date, at least 29 jurisdictions have tapped the sukuk market (excluding offshore domiciles) and more non-traditional sukuk issuers are expected to follow suit in the likes of Hong Kong and Luxembourg, in light of the United Kingdom’s highly successful sovereign sukuk programme. In the near future, sovereign issuances are expected from more non-OIC countries, particularly from global financial centres such as Luxembourg and Hong Kong. The continued recovery and stability in the global economy will support further expansion of sukuk issuances, and as such, prospects for the market in 2014 remain very bright

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