The real potential probably lies in between where issuers genuinely see sukuk as an attractive and competitive alternative way of raising funds and therefore a tool to diversify sources of funding. They would however go to the market only when the timing and the pricing is right. Such an issuance in question is the proposed Sharjah Islamic Bank (SIB) issuance which is expected to be closed this week.
Another brake on the recovery of the sukuk market over the last year or so in the wake of the impact of the financial crisis is yield volatility. This can serve as guidance to timing of an issuance, but not necessarily pricing given the sukuk is on average a medium-term product.
In fact, the two potential western sovereign issuances mooted over the last two years or so — UK and Luxembourg debut sovereign sukuk — have been put on the backburner for diametrically opposite reasons. The UK Treasury still maintains the “not value for money” reason for not going to the wholesale sterling market, although market players fail to see the rationale behind the reason and stress that it is a political decision not to issue a sukuk.
Luxembourg however last week ruled out an imminent sukuk issue on the grounds that its economy is doing well and there is no overwhelming need currently for the government to raise extra funding. Luxembourg tax authorities even last week published guidelines to facilitate securitization through Shariah-compliant vehicles under specific conditions including that there is no active management of the underlying asset. The guidelines are for two categories of sukuk - one treated as guaranteed debt securitization in the case of sukuk Al-Ijarah, and the other as asset-backed debt securitization.
This is the crux of the matter. Given the volatile economic conditions globally, institutional and high net worth investors prefer the relative safety and comfort of sovereign sukuk offerings, preferably but not necessarily AAA-rated sovereign paper.
Jamil El-Jaroudi , CEO of Elaf Bank, stressed in a recent interview that "although the sukuk market is dominated by sovereign and quasi-sovereign issuances, we are seeing a small number of corporate issuances coming to the market. We expect an improvement in the sukuk market in 2011, although investors are still cautious. I am confident that we may see the volume of sukuk reaching $30 billion in 2011 - the same size as before the crisis, although the market will continue to be dominated by sovereign and quasi-sovereign issuances. Perhaps in 2012, corporate issuances will start equaling origination activity in the sovereign market."
The reality, however, is that there simply are not enough sovereign sukuk around, and the signs are that this will remain the case for the next one or two years down the line. According to Noripah Khamso, CEO, CIMB Principal Islamic Asset Management, Malaysia, whose investors are institutional, including sovereign wealth funds and government agencies, market appetite for AAA-rated sovereign sukuk papers is healthy and her company cannot find enough sukuk to invest in. With the result she is being forced to turn down new orders from institutional clients interested in investing in such sukuk.
The dearth of sukuk originations may suggest continued caution of investors over global market conditions. Sukuk issuances are estimated to top $37 billion at end 2011 but market activity has been sluggish, especially from potential sovereign issuers, despite the hype and rhetoric.
In terms of sovereign sukuk issuances, the market outlook is indeed bleak. The UK and Luxembourg have said no for the moment. France remains ambivalent. Turkey won't countenance a sovereign issuance until after the general election on June 12, 2011. Saudi Arabia apparently does not need to raise funds through a sukuk and is satisfied with government-linked issuers such as SABIC (Saudi Basic Industries Corp.) and SEC (Saudi Electricity Company) taking the lead in sukuk originations. Kuwait is still mired in a political battle between the government and some factions in the National Assembly over a draft sukuk law. Qatar has ruled out a role for sukuk in the building of infrastructure for the FIFA 2022 World Cup.
Egypt, South Africa, Senegal and Kenya have all expressed their interest in issuing sovereign sukuk. But the time to market will be in excess of a year given that the requisite regulatory and legal framework will have to be introduced through amendments to existing legislation. This will be a drawn out process and will require structuring, Shariah compliance and market education. Given the ratings of the above three countries, it is likely that the issuances will be on the smaller side.
Malaysia, Bahrain and Pakistan are regular sukuk issuers, but most of these are in the domestic market and in local currency. Tatarstan, the Russian Republic, has mandated Amanah Investment Bank of Malaysia and the local IFC Linova to conduct a feasibility study for the issuance of the republic's debut sovereign sukuk. Sudan is also planning to go to the market to raise in excess of $250 million through a local currency issuance.
Iran too has been disappointing. A senior Central Bank of Iran official confirmed last week in Luxembourg that the government has no plans to raise financing through a sovereign sukuk issuance. His main reason was that it would be difficult because of the current UN sanctions regime against Tehran because of the nuclear energy issue. The official however claimed that $15 billion worth of sukuk were issued in local currency in Iran in 2010. In March, the local airline Mahan Air closed its first Sukuk Al-Ijarah - a 291 billion Iranian rial sukuk, which is listed and traded on Farabourse, Iran's OTC (over the counter) market, and the proceeds of which will be used to finance the expansion of the airline's network and infrastructure.
The official's explanation is unjustifiable given that Iran had plenty of opportunities to issue a sukuk over the last three decades, well before the sanctions regime started. Instead successive governments in Tehran have preferred to go to the Eurobond market instead to raise financing.
In the corporate sukuk issuance, caution similarly is the order of the day. This is reflected in the volatility in size, timing and pricing. Kuveyt Turk Participation bank (KTPB), for instance, after its successful debut $100 million issuance last year, has appointed Liquidity Management House to arrange a second sukuk this year. Initially, it was supposed to be a $250 million sukuk. Then it was talked up to be a $500 million sukuk. Now, it seems that the issuance may be in excess of $250 million.
"We are using the proceeds from the sukuk for balance sheet purposes to finance trade and projects. We have entered the project finance sector especially the energy sector, which is undergoing privatization. We have clients who are bidding for these projects in electricity generation and natural gas supplies. They need financing. In order to reduce the mismatch, this is a very important step for us. In terms of long-term borrowing, conventional banks can borrow 3-years or 5-years through bond issues and the taxation side has been in place for many years. We need similar treatment for the participation banks. There is only one route which is sukuk issuance. Recently parliament passed the tax neutrality measures for Ijara Sukuk, but we need the same level playing field for other sukuk structures," explained Ufuk Uyan, CEO of KTPB.
Several banks including Albaraka Turk Participation Bank, Albaraka Bank Bahrain, Bank Muamalat in Indonesia, Noor Islamic Bank, have indicated their interest in issuing of various sizes.
As for the Shrajah Islamic Bank sukuk, international rating agency, Standard & Poor's Ratings Services, has assigned a preliminary “BBB+” issue rating on the sukuk trust certificates to be issued on May 27, 2011, by SIB Sukuk Company II Ltd., a special purpose company (SPC) with Sharjah Islamic Bank as the obligor and managing agent. The proposed offering is a five-year $400 million sukuk, but the final size and pricing will be established nearer to the closing of the transaction. The sukuk will be listed on the London Stock Exchange.
