Global sukuk sales set to beat 2012 record as Gulf issuers take lead

A pedestrian passes the headquarters of Dubai Islamic Bank in Dubai (file). The government of Dubai kicked off sovereign sukuk sales last month with $750mn of 10-year Islamic notes after its borrowing costs dropped 40%.

Bloomberg/Dubai

Global Islamic bond sales are set to surpass the 2012 record as Gulf issuers take the lead to tap borrowing costs that tumbled in the past year, according to HSBC Holdings, last year’s top sukuk underwriter.

Sales in the six-nation Gulf Co-operation Council will surge to between $30bn and $35bn in 2013, Mohammed Dawood, Dubai-based managing director of debt capital markets at HSBC Amanah, said in an interview. That is up as much as 64% from last year. The government of Dubai kicked off sovereign sukuk sales last month with $750mn of 10-year Islamic notes after its borrowing costs dropped 40%.

“We will see a number of new issuers in the region who have now actually taken a hard look at this and said ‘okay look this makes a lot of sense for us,’” Dawood said last Thursday. “‘Not only can we get the size, can we get the tenure, but potentially from a pricing perspective, there is a real cost saving and there is a cost benefit.’”

Sukuk sales more than doubled between 2010 and 2012 to $46bn as issuers sought to tap wealth of Muslim investors who prefer returns complying with the religion’s ban on interest. Islamic financial assets will double by 2015 to as much as $3tn, Standard & Poor’s estimates show. While sales are off to a slower start this year, governments and companies from Turkey, Indonesia, Australia and Hong Kong may help spur worldwide issuance to $55bn to $60bn, said Rafe Haneef, HSBC Amanah Malaysia chief executive officer.

The average yield on GCC sukuk dropped 117 basis points, or 1.17 percentage points, in the past year to 3.04% on Friday, according to HSBC/Nasdaq Dubai’s GCC US Dollar Sukuk Index. Non-Islamic bonds from the Gulf yield 37 basis points more, HSBC/Nasdaq Dubai data show.

HSBC arranged 24% of the world’s 2012 Islamic bond sales, taking the top underwriter position from Kuala Lumpur- based CIMB Group Holdings, which held the spot for five years, according to data compiled by Bloomberg. The London-based lender helped Turkey arrange $1.5bn of debt Islamic bonds in September.

That sale “created its own momentum” and may spur “further activity at the government level and at the government-related enterprise level,” Dawood said. “There is a tremendous amount of interest among issuers to look at sukuk,” he said. Turkey, a majority Muslim nation, has biggest economy in the Eastern Europe and the Middle East, excluding Russia.

Malaysia, home to the world’s largest Islamic debt market, is also poised to witness growth this year and, along with the Asia Pacific region, will account for about half of global sales, according to Haneef.

“We will see an increased issuance but from multitude of markets as opposed to just Malaysia and the Middle East,” he said. “Five years ago, it was dominated by two centres: GCC and Malaysia. Now you are seeing Turkey, Indonesia, and hopefully others like Australia and Hong Kong will follow suit.”

Still, sukuk sales globally are down 20% to $5.35bn so far this year, data compiled by Bloomberg show. By this time in 2012, Saudi Arabia’s civil aviation authority had raised $4bn for an airport in Jeddah, giving a boost to a year that also saw Qatar sell the same amount.

“Saudi will be an important driver of that just by virtue of its size,” Dawood said. “If the government now issues domestically, it will issue in sukuk format and that sends a very strong message out to many other entities that this is the way going forward.”

Sukuk sales, which amounted to about 1% of the world’s $3.8tn of bond sales in 2012, may also be affected if there is “a broader weakening across the board in the fixed-income market,” Dawood said.

The average yield on GCC corporate sukuk rose the most in 14 months in January, after a four-year rally eroded returns. Emerging-market equities will offer better returns than bonds this year, Royal Bank of Scotland Group’s wealth management unit, Coutts & Co, said last week.

“That may well be a sort of dark cloud which hangs over and perhaps not help the market reach the overall targeted levels,” Dawood said.

Still, borrowing costs have begun to fall again, with the yield on Dubai’s 6.396% notes due 2014 posting its first weekly drop in four last week.

The drop in costs enticed Dubai to sell its first 30 year debt last month. While those notes were non-Islamic, some issuers could opt for longer tenures this year, including “potentially” 30-year sukuk, to tap appetite of investors searching for higher yields, Dawood said.

“You’ve got issuers who like low rates for long-term funding, and you’ve got investors who also now want to look at long-term because that’s where there is greater yield,” he said.