Debut Islamic bonds from governments and companies seeking to cut financing costs will drive sukuk sales next year, according to HSBC Holdings Plc, with issuance probably rebounding to a record.
Growth will be boosted as borrowers follow governments from Dubai to Malaysia, which are seeking to promote Shariah-compliant bonds and become centers for Islamic finance, said Mohammed Dawood, global head of sukuk financing at HSBC, the bank that managed the most sukuk sales in 2013. The London-based lender is also working to introduce new instruments to help the securities compete with conventional bonds, he said by phone Dec. 22.
Islamic bond sales fell 9.5 percent in 2013 to $42 billion after reaching a record $46.4 billion last year, according to data compiled by Bloomberg, in a market dominated by repeat borrowers. About $60 billion of sukuk will be sold in 2014, primarily by Malaysia and the Gulf countries, Moody’s Investors Service said in a report last month.
“In 2014, we will see a shift to new issuers,” Dawood said from Dubai. “We will see a lot more coming out of Asia and a lot more issuance from outside of the traditional markets.”
Financial centers around the world have announced plans to sell Islamic bonds as part of efforts to grab a greater share of an industry whose assets will more than double to $2.7 trillion by 2017, according to PricewaterhouseCoopers LLP. Hong Kong, the world’s fifth-largest currency-trading center, said in November it will offer a debut sukuk to spur capital markets. In October, U.K. Prime Minister David Cameron said the country planned to sell Islamic notes.
“You have more debt maturities in 2014, especially in Dubai, so this will drive issuance,” Montasser Khelifi, a Dubai-based senior manager for global markets at Quantum Investment Bank Ltd., said by e-mail yesterday.
Issuers in the Gulf Cooperation Council have about $32 billion of bonds and syndicated loans maturing next year, according to data compiled by Bloomberg. Among the debt is a $500-million note from Dubai due in November while Abu Dhabi’s Tourism Development & Investment Co., which is building museums in the U.A.E. capital, has to pay a $1 billion bond in July.
Dubai, one of seven sheikhdoms that make up the United Arab Emirates, said this year it’s seeking to become the capital of the global Islamic economy.
“The announcements that we have seen from the likes of Dubai and the region have really given the product a lot more awareness, particularly among international markets,” Dawood said. “That has led to a whole series of enquiries and interest from countries, from issuers who otherwise would be not so obvious targets for sukuk issuance.”
HSBC has helped manage 110 sales this year, giving it a 17 percent share of the global sukuk market, according to data compiled by Bloomberg. Kuala Lumpur’s CIMB Group Holdings Bhd and Malayan Banking Bhd, which mainly deal with sales in Malaysia, the largest sukuk market, were the second- and third-biggest, respectively. HSBC was a manager of the 15.2 billion riyals ($4.06 billion) issue of Saudi Arabia’s General Authority of Civil Aviation in September in the biggest sale of such securities this year, according to data compiled by Bloomberg.
“In 2014 you will see continued development toward new instruments,” Dawood said. We are “looking at what is available on the conventional product offering, looking to see how that can be structured for the Islamic market” such as the perpetual sukuk, he said.
Perpetual sukuk, which don’t mature, have grown in popularity since the first such issue in dollars by Abu Dhabi Islamic Bank PJSC in November 2012. Four perpetual sukuk have since been sold in the GCC as companies have used them to shore up capital without hurting their creditworthiness since the instruments are treated as equity on the balance sheet.
Within the six-nation GCC, which includes the two biggest Arab economies of Saudi Arabia and the United Arab Emirates, $21.1 billion of sukuk have been sold this year, about the same as in 2012, data compiled by Bloomberg show.
Sukuk are designed to comply with Shariah law’s ban on interest. The average yield on the Islamic bonds sold by GCC issuers was at 3.77 percent yesterday, according to HSBC/NASDAQ Dubai indexes. That compares with an average yield of 4.17 percent on non-Shariah-compliant bonds for council issuers, according to the data.
Possible volatility in global interest rates caused by a cut in monetary stimulus by the U.S. may influence the timing of new issues, although the pool of Islamic liquidity remains “very strong,” Dawood said. It may also push issuers to use local currencies such as the Malaysian ringgit or the Saudi riyal, he said.