Top arranger sees record 2017 sukuk sales with momentum building

The Edge Markets, 3 October 2017

KUALA LUMPUR/DUBAI (Oct 3): Cheap oil and ambitious infrastructure-building programs have set the scene for a record year for Islamic bond sales. The top arranger of the notes says these dynamics will keep driving issuance into 2018.

Persian Gulf governments have tapped Shariah-compliant debt markets to plug revenue shortfalls caused by persistently low crude prices. Saudi Arabia led the way with a US$9 billion global offer in April, while Oman and Bahrain have also sold sukuk. In Malaysia, the world’s biggest market for the bonds, funding for rail and other projects is driving ringgit issuance by state-owned companies.

Sukuk sales have reached US$41.9 billion so far this year, closing in on the all-time high of US$51.6 billion in 2012, according to data compiled by Bloomberg. CIMB Islamic Bank Bhd., which has arranged the most Islamic note sales by value this year, is anticipating a record year and “this momentum will be continued through to 2018,” said Mohamed Rafe Mohamed Haneef, the lender’s Kuala Lumpur-based chief executive officer.

“With energy prices still relatively low, governments in the Gulf are facing issues balancing their budgets,” said Apostolos Bantis, a credit strategist at Commerzbank AG in Dubai. “Saudi Arabia, which still has a low debt-to-GDP ratio, could sell more bonds comfortably for the next one to two years without being penalised by rating agencies.”

Apart from the Saudi offer, the biggest sales so far this year are:

Hong Kong sold US$1 billion of dollar Islamic notes in February
Indonesia sold US$3 billion of global sukuk in March and Turkey sold $1.25 billion of the debt in the same month
Oman sold US$2 billion of sukuk in May and said in August it was planning more debt sales this year
Bahrain sold US$850 million of sukuk in September

In Malaysia, state-owned companies DanaInfra Nasional Bhd. and Prasarana Malaysia Bhd — which are building MRT and LRT projects in Kuala Lumpur — have been among the biggest corporate issuers this year.

Fakrizzaki Ghazali, head of fixed income at Sedco Capital in Jeddah, said he was forecasting total sales of US$55 billion to US$60 billion for 2017. Supply dynamics should remain favourable in 2018, but issuance may drop if oil prices recover and the Federal Reserve turns more aggressive in raising U.S. interest rates, he said.

The travails of Dana Gas PJSC — a U.A.E. company that stunned investors and the Islamic finance community, when it announced in June that it had reviewed its own bonds and found they were not Shariah-compliant -- could also sap demand, Fakrizzaki said.

Islamic bonds use a variety of structures to link returns to assets to comply with the religion’s ban on interest. The securities were pioneered in Malaysia in the 1980s and in recent years their popularity has seen them spread beyond Muslim- majority countries with the U.K. and Luxembourg selling the notes.

Malaysia has accounted for around two-thirds of worldwide sales this year, said Angus Salim Amran, head of financial markets at RHB Investment Bank Bhd. in Kuala Lumpur, who is forecasting full-year issuance of US$56.3 billion.

“A higher number of Malaysian asset managers increasing their fund allocation into Shariah- compliant investments will also act as a strong pull factor for sukuk and anchor higher issuance going forward,” he said.

Demand is also strong in the Persian Gulf, with a “captive audience of Islamic banks searching for new securities to buy,” Commerzbank’s Bantis said.

(Web source: http://www.theedgemarkets.com/article/top-arranger-sees-record-2017-sukuk-sales-momentum-building)