The depth of the impact of the global financial crisis and particularly of the Islamic capital and debt markets is becoming clearer even as the crisis starts to recede and the sukuk (Islamic bonds) market starts its recovery.
The latest study published this month by Trowers & Hamlins, the London-based international law firm that has a well-established Islamic finance legal practice, confirms that the value of corporate conventional bonds issued in the Gulf Cooperation Council (GCC) countries has overtaken the issuance of corporate sukuk for the first time. For the year ending June 31, Gulf corporates issued $12.8 billion in conventional bonds compared to just $4.3 billion in Sukuk. In fact, the value of conventional corporate bond issuance in the GCC increased year-on-year by 15 percent, whilst sukuk issuances fell 74 percent for the same period.
Neale Downes, regional banking and finance partner in the Bahrain office of Trowers & Hamlins, called the growth of conventional bond issuances “unprecedented in the relatively short history of the Gulf’s debt markets.”
But he remains optimistic that the long-term future of sukuk as a corporate fund-raising instrument is established. “Sentiment toward corporate sukuk has recovered substantially since the worst of the market in early 2009,” he said. “Their yields are now moving close to their levels before the collapse of Lehman Brothers. Government intervention in the region’s economy is beginning to bear fruit, and the rise in oil prices should add extra fuel. We are not out of the woods yet but if the market recovery continues it may be that the sukuk market will come back fundamentally stronger having survived its first real test.”
According to a recent Trowers & Hamlins study, the turmoil in capital markets finally swept into the GCC with the price of corporate sukuk falling much further than the region’s corporate bonds. For instance, yield on corporate sukuk increased to 17 percent whilst the yield on the comparable index of Gulf corporate bonds at that point only increased to 11 percent, thus making sukuk more expensive. Not surprisingly, Gulf corporates were forced to switch to issuing conventional bonds because investors were demanding yields higher than what could be had with Sukuk.
Similarly, the average length of time to maturity of GCC corporate sukuk issued over the last 12 months was 6.9 years against 7.4 years in the previous twelve months, which also suggests a reduced-risk appetite amongst sukuk investors over the last year.
The international law firm explained that there are a number of commercial or market-related factors that has led to the above situation. During times of financial stress, for instance, investors tend to avoid newer, complex and less-tested forms of investment for more traditional investments. This is a trend from which sukuk are more likely to suffer compared to conventional bonds.
Perhaps more revealingly, the property market has taken a big hit in the GCC region, with Dubai, Kuwait and Qatar the most affected. And with regional real estate and construction companies being relatively heavy issuers of Sukuk, the slump in the property market and in valuations may have had a knock-on effect on investor sentiment toward sukuk issued by companies in these sectors. In 2007-08, for instance, 38 percent of sukuk issuances were by realty companies whereas only 5 percent of conventional Gulf corporate bond issuances in the same period were from real estate companies.