LONDON, 9 October 2006 — The rise of Sukuk (Islamic bonds), especially corporate Sukuk, has shown a spectacular increase in the Gulf Cooperation Council (GCC) region in the first half of 2006. Sukuk issues now accounts for 81 percent of the total new Gulf bond issues, compared to just 26 percent in 2005.
According to research published recently by City-based international law firm Trowers & Hamlins in London, GCC-based non-sovereign borrowers issued $4.59 billion worth of Sukuk between January and June 2006, a 117 percent increase on the $2.11 billion for the same period in 2005.
“There has been a huge inflow of oil wealth into Islamic investment funds which are seeking Shariah-compliant vehicles — such as Sukuk, in which to channel funds,” explained Neale Downes, Partner at Trowers & Hamlins, which has five offices in the Middle East and has a thriving Islamic finance business, having acted for parties on several big ticket Islamic transactions in recent years.
According to the law firm, the total value of all bonds (both sovereign and corporate) issued in the Gulf region in the first six months of 2006 was $10.24 billion — up 25 percent on the $8.22 billion for the same period in 2005.
Some of the major Sukuk issues this year have been the SR3 billion ($800 million) offering from SABIC (Saudi Basic Industries Corporation) whose proceeds are being used for general corporate finance purposes and for the equity of plants such as Saudi Kayan; and the $200 million issuance on behalf of Tabreed (National Gas Cooling Company) in the UAE.
The principal drivers for the proliferation of Sukuk in the GCC region are the huge liquidity in the region due to the high oil prices over the last few years, and the huge increase in Gulf-based Islamic investment funds, which are creating demand for investments which are Shariah-compliant.
In the last four years corporate Sukuk issues in the GCC have grown exponentially from a mere 122 million in 2003 to $1,712 million in 2004 to $2,147 million in 2005 to $4,585 million in the first half of 2006.
What is encouraging is the increasing exposure of foreign investors and banks, especially Western institution, in the GCC Sukuk market. “Foreign investors represent an increasingly dominant segment of the market for Shariah-compliant debt. What is really significant is that they are now comfortable buying corporate Sukuk and not just those issued by sovereign (government or government-backed) borrowers. Issuers of Sukuk gains access to a much wider investor base than conventional debt securities and, as more investors bid for the paper, pricing can be very competitive. For big issuers this translates into substantial savings,” explained Neale Downes.
Hardly any Sukuk is issued these days without the involvement of the likes of HSBC, Deutsche Bank and Citigroup. The only other major lead manager and arranger is Malaysia’s CIMB, which in fact has overtaken the western majors in this respect in the last two years. CIMB, whose Islamic activities is headed by Badlisyah Abdul Ghani, is particularly attracting mandates in the GCC region and recently participated in a beauty parade with the likes of HSBC and Citigroup for the mandate for a proposed $150 million issuance by an Omani oil company.
Sukuk, like Murabaha, is now becoming an internationally-acceptable financial instrument in the global markets. Two years ago, for instance, the German state of Saxony-Anhalt issued the first Sukuk originated in the West — a $400 million issuance, which was arranged and largely underwritten by Citigroup. Earlier this year Texas-based East Cameron Partners, a US gas company with reserves off the coast of Louisiana, issued the first Sukuk, a $170 million issuance, to be originated out of America and lead arranged by BSEC, a Lebanese investment bank.
A major advantage of Sukuk over conventional unsecured bonds is that Sukuk are secured against the underlying value of the asset being financed. As such investors need worry less about the creditworthiness of the issuer and instead can focus on the inherent potential of the project for which the finance is being raised.
Not surprisingly, to Neale Downes the Sukuk, being asset-backed instruments, are ideal for raising finance for infrastructure and real estate projects. Indeed, the pipeline of such developments and projects, confirmed Trowers & Hamlins, “looks robust” and with multi-sourced financing for larger projects now increasingly the norm in the GCC region, Sukuk issuance is projected to remain very strong in the second half of 2006 and to continue to grow strongly in the next few years.
Another important development is that the increased familiarity with Sukuk among investors and bankers, is bringing down the cost of issuing and marketing Sukuk. Established securitization companies, stressed Trowers & Hamlins, are also bringing their expertise in refining structures especially, credit-enhancement techniques, which are further reducing transactional and financing costs.
However Neale Downes warned, “What the (Sukuk) market really needs now is a more active secondary market.”