$7 billion of sukuk was issued in the Gulf in 2009-10 (June 30), compared to $4.3 billion the previous year.
At the same time, issuance of conventional bonds surged to record levels. The value of conventional bonds issued in the Gulf hit $15 billion in 2009-10 compared to $12.9 billion the year before, an increase of 16.3 percent.
The firm says that the sukuk market was hit much harder by the credit crunch and global financial crisis than the conventional bond market in the Gulf.
Neale Downes, regional banking and finance partner at the Trowers & Hamlins’ Bahrain office, says: “While sukuk issuance has rebounded, it is still less than half of its peak in 2007-08. The financial crisis was the first real test for sukuk. Investors are flocking to the comparative safety of conventional bonds while issuers address some of the particular legal and structural concerns surrounding sukuk and their robustness in a default or insolvency scenario.”
He adds: “The crisis laid bare several misunderstandings about sukuk. Many investors assumed that sukuk came with a sovereign guarantee, or that if the issuer defaulted they would have an underlying asset as ‘security’ or that they, or their trustee, had sole recourse to such assets.
The limitations of merely asset-based sukuk are now more widely understood. With a restricted access to liquidity from banks, borrowers have been forced to access other sources of debt or capital. But with the cost of issuing sukuk now about 60 percent more expensive than bonds, corporates have largely turned to conventional debt.”
He explains: “The market reached its nadir in 2009 but sentiment towards sukuk now appears to be recovering strongly. There is every reason to believe that demand for sukuk will eclipse its pre-credit crunch peak in the coming years.
“The idea of taking possession of tangible assets on default, often real estate, made sukuk very attractive to investors. The reality has turned out very different, with sukuk investors having to form an orderly queue with other unsecured creditors of the originator.”
The further interaction between English law, local laws and the Shariah (not law per se but a set of principles and teachings) adds a further level of complexity both when putting deals together and when later seeking to unwind or restructure such arrangements, he added.
