The worst-performing Islamic bond from a GCC borrower was a ringgit-denominated sukuk due 2022 from Abu Dhabi National Energy Company, known as Taqa, according to data compiled by Bloomberg.
Bloomberg/Dubai
This year is shaping up to be a disappointing one for Islamic bond sales in the six-nation Gulf Cooperation Council.
Sukuk issuance in the region has slumped by more than half through June 28, according to data compiled by Bloomberg. It’s a setback for the Shariah-compliant industry, in which deals are structured to adhere to the religion’s ban on interest. Sales from GCC nations accounted for 31% of all global Islamic bonds in 2014.
Below are the key takeaways for the Gulf’s Islamic-bond industry in the first six months of 2015:
Sukuk drought
Islamic bond issuance from the GCC has plunged 53%, the steepest decline for the region since at least 2007. About $5.5bn has been raised, compared with $11.7bn in the same period last year.
“People are concerned about US Fed rates, Greece,” Abdul K Hussain, the Dubai-based chief executive officer of Mashreq Capital DIFC Ltd, which runs the best-performing Islamic fixed-income fund in the Middle East and Africa for the past 12 months, said by phone on June 25. “You need to get these things out of the way before we’ll see more issuance. If the Fed raises rates, we’ll see quite a bit of issuance. I’m hoping after Ramadan it will pick up.”
Still, “it doesn’t look like it will be higher than last year,” he said.
The decline has more to do with the level of issuance in the previous years, according to Ahmed Shehada, the head of advisory and institutions at NBAD Securities, the brokerage of the UAE’s biggest bank.
The “last two years have been wild in terms of new issuances, it has been exuberant,” Shehada said by phone on June 28. “This is more normalisation than a drop.”
Lending growth
About 27% more has been raised with Shariah-compliant loans from the GCC than in the same period a year ago. Conventional and Islamic loans combined grew 31%.
“Loan growth has been much higher for both because of the competitive environment, because the banks in the GCC are flush with liquidity,” Anita Yadav, the head of fixed-income research at Emirates NBD, Dubai’s biggest bank, said by phone from the emirate on June 28. Volatility and uncertainty about the US rate increase are poised to continue and bank liquidity will slow down a “little bit, but not materially,” she said.
Taqa slump
The worst-performing Islamic bond from a GCC borrower was a ringgit-denominated sukuk due 2022 from Abu Dhabi National Energy Company, known as Taqa, according to data compiled by Bloomberg. The sukuk has lost 8.2% this year.
The company’s first-quarter profit dropped 6.6% as revenue from oil and gas declined, and the ringgit weakened 7.6% this year, the most among Asian currencies, according to data compiled by Bloomberg. Taqa also requested in March that Malaysian rating company RAM Holdings Berhad withdraw the grade for its sukuk programme.
“This has led to a knee-jerk reaction by the sukuk holders,” Fakrizzaki Ghazali, a credit strategist at RHB Research Institute Sdn in Kuala Lumpur, said by e-mail on June 25. “The non-rated status of the ringgit sukuk has impaired secondary liquidity greatly, hence it has very limited reason to rally.”
Sukuk vs bonds
Sukuk from GCC borrowers are outperforming bonds this year, according to data compiled by Bloomberg. Islamic bonds returned an average 1.8%, compared with 0.8% for conventional bonds.
“The primary concern is about the interest rate hike, and whoever is holding good quality, short-dated paper doesn’t want to sell,” said Shehada. “With the last piece of information from the Fed suggesting that an interest rate hike might not come as quickly as anticipated, that could fuel a bit more volume over the next couple of months.”
