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Islamic bond supply/demand gap to peak in 2014

Dubai, November 20, 2013

A gap between global supply and demand for Islamic bonds is likely to peak in 2014 and then shrink gradually for several years as issuance grows, a study by Thomson Reuters predicted.

Potential demand for sukuk among cash-rich Islamic investors in the Gulf and southeast Asia has exceeded supply for at least several years, analysts estimate.

Companies and banks have taken time to acquire the expertise to issue sukuk, while many companies have been repairing their balance sheets since the global financial crisis and have not been in a hurry to issue.

The imbalance has helped to produce very low yields for sukuk at issue - in some cases, sukuk have priced inside conventional bonds.

The picture may start to change after next year as issuance picks up, the report said. It forecast the supply-demand gap would rise to $229 billion in 2014, from $211 billion this year, but then edge down to $187 billion by 2018.

The report assumes among other things that Islamic institutions aim to allocate around 30 per cent of their funds to sukuk.

New global issuance of sukuk in 2013 is expected to fall shy of last year's record level, coming in at about $100 billion against $134 billion in 2012, the report predicted.

During the first nine months of 2013, sukuk issuance in all currencies fell by more than a quarter to $79 billion from $109 billion a year ago, because of a rise in global credit spreads since May due to the prospect of US monetary tightening.

However, the report forecast that sukuk issuance would resume rising rapidly next year, hitting $130 billion in 2014 and $237 billion in 2018.

The report found Malaysian issuers continue to dominate the sector because of their heavy use of local-currency sukuk; they issued $54.3 billion worth of Islamic bonds in the first nine months of 2013, followed by Saudi Arabia with $8.7 billion, the UAE with $5.2 billion and Indonesia with $5 billion.

Traditionally, many investors hold sukuk until maturity, but this is changing slowly, according to the report's survey of 155 investors and sukuk arrangers during August and September.

Only 14.5 per cent of investors now expect to hold to maturity, down from a quarter in last year's survey. Sukuk are increasingly being seen as mainstream investment options, which encourages trade in them.

A total of 47.3 per cent of investors said they would hold sukuk for between one and three years, up from 42.4 per cent last year. Only 12.7 per cent expected to hold sukuk for less than a year, down from 19.2 per cent.

Investors' preference for dollar-denominated international issuance decreased in favour of better-yielding local currency sukuk; half of investors said they preferred international sukuk in the latest survey against almost three quarters last year.

Most sukuk are still traded over the counter - only 32 out of 520 sukuk issued in the first nine months of 2013 were listed on exchanges, a proportion that was almost unchanged from 2012.

Partly because of the relative complexity of sukuk structures, which avoid interest payments, issuing sukuk is often more expensive than issuing conventional bonds. Most sukuk arrangers, 72 per cent, said they regarded sukuk as a generally more expensive option; almost half expected the additional costs to exceed $200,000.

But most issuers, 61 per cent, said they would still issue sukuk if the yield they had to pay was 50 basis points higher than what they would pay on a conventional bond. A full 26 per cent said they would issue sukuk regardless of the yield difference.-Reuters

Tags: Saudi | sukuk | Islamic Bonds |

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