Gulf sukuk sales fall exposes market weaknesses

Bloomberg/Dubai

Gulf Islamic bond sales fell this year, compared with an increase in Asia, highlighting the reluctance of smaller businesses in the region to issue sukuk.

The number of Shariah-compliant bond offerings in the Gulf Co-operation Council has fallen 29% in 2013 from a year earlier to 17, while Malaysian issuance increased 14% to 230, according to data compiled by Bloomberg. The value of sukuk sales in the GCC and Malaysia, home to the world’s biggest sukuk market, has slumped as concern the Federal Reserve will scale back its bond-buying programme deterred issuers.

Sovereign or quasi-government issuers, which prefer to sell bonds denominated in dollars to target international investors, dominate sales in the six-nation GCC, leaving them “more exposed” to global market fluctuations, said Rizwan Kanji, Dubai-based partner at King & Spalding. The drop in GCC sales mirrors worldwide bond-sale numbers, which are down 12% in 2013.

“The drop in the number of issues in the GCC is primarily because medium-sized private enterprises don’t tap the market,” Kanji said by phone on July 22. “We’re a few years behind Malaysia, where private companies have access to a liquid local- currency market.”

Malaysian volumes have resisted this slowdown mainly because more companies are able to tap the local market for smaller amounts of money. Half of the 34 issuers tracked by Bloomberg each sold less than 400mn ringgit ($126mn) of sukuk in 2013. The total value of sales of bonds that comply with Shariah ban on interest dropped 64% in Malaysia this year to 20bn ringgit, data compiled by Bloomberg show.

GCC sales retreated 38% to $11bn primarily due to the absence of state-linked issuers in the past two months. Since late May, only Saudi Binladin Group, a privately held construction company in the kingdom, has tapped bond markets, selling 1bn riyals ($267mn) of sukuk in a private placement.

About 83% of GCC bond sales this year were from government and state-linked issuers including the Dubai government, Saudi Electricity Co and the Dubai Electricity & Water Authority.

“There’s not much corporate sukuk activity,” Emad Mostaque, London-based strategist at Noah Capital Markets EMEA Ltd, said by phone on July 22. “The rest of the world is far more used to it, whereas in the GCC you can only name a handful.”

The potential pool of corporate bonds is substantial since between 75% and 90% of Middle Eastern companies are owned and run by families, according to the Dubai-based Tharawat Family Business Forum, an independent network of Arab family businesses.

Company issuance may get a boost as government-linked entities raise more funds to refinance debt and invest in infrastructure projects, according to Mostaque. Saudi Arabia is pursuing spending plans valued at more than $500bn to build roads, expand industrial output and create jobs, while Qatar plans to invest $200bn before hosting the 2022 soccer World Cup.

“We need to see those large issues return to stimulate the whole market,” Mostaque said. “There’s a lot of maturing debt next year, while infrastructure spending is set to increase. Any corporate issuance will stem from that.”

A drop in yields last month may entice corporate issuers to follow in Saudi Binladin’s footsteps. Dubai Investments, which holds stakes in more than 40 businesses from real estate to glass, said last month it plans to revive a sukuk sale in August after it secured a credit rating.

Apart from Saudi Arabia, the regional local-currency debt market is sparse. All non-state linked sukuk sales in the region were from Saudi companies, including more than three-quarters denominated in riyals.

Private businesses often opt instead to pursue loans from banks, discouraged from bond markets by the need to improve disclosure and pay higher costs, Kanji of King & Spalding said. Typical GCC issuances are only cost effective for sales above $150mn, he said, whereas offerings as small as 10mn ringgit have taken place this year in Malaysia.

“The future for the GCC is about expanding the sukuk market out of sovereign and toward medium-sized enterprises,” Kanji said. “In Malaysia, the domestic-currency market for sukuk is so good there is a cost-benefit.”