Commodity prices at 16-year low deterring new issuance plans; Shariah-compliant yields at
eight-month high amid outflows

Bloomberg
Kuala Lumpur



Islamic bond sales are heading for the slowest quarter since 2010 as an emerging-market sell-off and commodity prices at a 16-year low prompt issuers to shelve expansion plans.
There have been $2.8bn of sales worldwide since the end of June, including just $979mn in August, data compiled by Bloomberg show. The last time quarterly issuance was less than $5bn was in the first three months of 2010. The big oil companies have already cut spending by $60bn this year amid the plunge oil prices.
The sukuk pipeline is drying up as companies defer expansion plans in response to plunging resource prices and concern over the impact of a US interest-rate increase. Shariah-compliant bond yields have climbed to an eight-month high as China’s deepening economic slowdown prompted outflows from developing-nation assets.
“Even top credits will have difficulties placing a bond,” said Sergey Dergachev, a senior portfolio manager who helps oversee $13bn of emerging-market debt at Union Investment Privatfonds GmbH in Frankfurt last week. “Investors are nervous since it is difficult to envisage how far the selloff will go.”
The slowdown in issuance comes as average yields on Shariah-compliant debt climbed 33 basis points in the past three months to 3.16%, according to a Deutsche Bank AG index. They rose to 3.23% in the week before last, the highest since December.
Emerging markets from Brazil to Indonesia have been rattled by signs Asia’s largest economy is heading for a hard landing after the People’s Bank of China devalued its currency on August 11. The central bank’s recent interest-rate cut, the fifth since November, did little to assuage concerns.
The deceleration in the economy of China, the world’s biggest consumer of energy and industrial metals, is compounding a slump in resource prices. The Bloomberg Commodity Index of 22 raw materials from oil to metals fell 0.9% in August and 14% so far this year. The gauge dropped to the lowest level since 1999 on August 26.
“Capital expenditure plans have been cut substantially as commodities collapsed further during the month,” said Fakrizzaki Ghazali, a credit strategist at RHB Research Institute Sdn in Kuala Lumpur. “This doesn’t provide incentives for companies to expand and borrow heavily.”
Sukuk offerings from the six-nation Gulf Cooperation Council are down 41% this year to $6.9bn, according to data compiled by Bloomberg. Sales of Malaysian ringgit corporate Islamic debt fell 29% to 31bn ringgit ($7.5bn) in 2015 from the same period last year. Worldwide issuance is down 26% to $23.7bn so far in 2015.
Some companies are still proceeding with sukuk sale plans. Saudi Arabia’s National Commercial Bank will sell 2bn riyals ($533mn) of Islamic bonds before the end of the year, according to a Reuters report on August 23 that cited unidentified sources. A unit of Malaysian power utility Tenaga Nasional Bhd is planning to issue up to 10bn ringgit of Shariah-compliant notes and telecommunications company TIME dotCom Bhd will set up a 1bn ringgit debt programme that complies with Islam’s ban on interest.
Most companies are likely to hold off for the next couple of weeks as they wait for more clarity on the outlook for emerging markets, according to Union Investment’s Dergachev.
“Any meaningful pickup in issuance needs to be accompanied by a stronger oil price, which still looks rather sluggish given the supply pressure,” said Winson Phoon, a Kuala Lumpur-based bond analyst at Maybank Investment Bank Bhd.