The anticipated launch of IDB's $500 million international Sukuk this month and a huge improvement in the average price of and yield from Sukuk over the last four months is further evidence that the market is rallying fast and on track for a dramatic upturn in confidence over the next year.
Economic and fiscal stimulus packages in the GCC countries, including the $10 billion bailout loan given to Dubai by the UAE Central Bank, the recent rally in world capital markets and rising crude oil prices, have impacted positively on the GCC Sukuk market in the past quarter.
"Since the market's darkest day on Feb. 11 the average yield on corporate GCC Sukuk has fallen from 17.2 percent to 10.1 percent and the average credit spread over LIBOR has narrowed from 1,414 to 763 basis points, based on the HSBC/DIFX GCC Corporate US Dollar Sukuk Index," explained Trowers & Hamlins in a report issued recently.
Bahrain is planning two imminent sovereign Sukuk issuances - a domestic Sukuk offering and a planned $500 million international Sukuk. These offerings, say bankers, should kick start the Sukuk market in the GCC, triggering a number of other new deals to follow later this year if issuers become more confident that they can attract investors.
Similarly, the Islamic Development Bank (IDB) is finalizing the legal documentation for its planned $500 million international Sukuk issuance. Depending on the pricing, the IDB may yet increase the volume of the issuance, which is expected to be launched at the end of this month.
Neale Downes, partner at Trower & Hamlins, explained, "The recent sharp rise in the average price of GCC corporate Sukuk has been fuelled by the growing belief that corporate Sukuk default risk has been greatly reduced. Many corporate Sukuk are seen as effectively having a sovereign or quasi-sovereign risk attached."
The net impact in Dubai has been that government-linked companies have benefited directly from the UAE Federal loan, which has enabled them to resume the payment of outstanding bills. With governments also actively helping companies refinancing loans coming to maturity, this has helped decrease corporate default risk.
In the UK, the Finance Bill 2009, which is currently going through its final stages in the Houses of Commons and Lords, will introduce relieving measures for stamp duty land tax, capital gains and capital allowances rules for land transactions involved in connection with the issuance of Sukuk.
The changes are intended to remove the previous tax barriers that essentially prevented the issuance of real estate backed sukuk by UK corporates - thus enabling sukuk to be held, issued and traded without incurring stamp duty land tax and corporate tax costs over and above that which would be incurred in connection with similar dealings in traditional corporate bonds.
According to Deloittes, "The UK government continues to take steps toward creating a level playing field between Islamic and conventional finance and promoting the UK as a center for Islamic finance. However, there remain some practical points regarding the application of the draft legislation as currently published which could give rise to a claw-back of the above tax relief in certain benign yet commercial situations. It would be fairer for no claw-back of tax relief to arise or for carve-outs to be included to deal with circumstances where the relevant conditions for the tax relief are not met for reason of events outside the bond-issuer's control."
