Interview: End of Sukuk Premium

The “sukuk premium” – the additional cost which borrowers must pay to issue an Islamic bond instead of a conventional bond – has effectively disappeared, and this will stimulate a boom in sukuk issuance while lengthening tenors, a senior executive at Deutsche Bank said.

“I don’t think there is an Islamic premium anymore,” Salah Jaidah, head of Islamic finance at the bank and chief country officer for Qatar, said in an interview this week.

Until late last year, sukuk issuers commonly paid a premium because they catered to a smaller investor base and because investors were not as familiar with sukuk structures as they were with conventional bonds.

This year’s heavy investor demand for sukuk, due to the appetite of cash-rich Islamic investment funds and the Gulf’s growing reputation as a relatively high-yielding safe haven, has transformed the market. Many high-grade credits – such as Qatar, in its record $4 billion deal this month – now pay less to sell sukuk than they would for conventional bonds.

Jaidah said the shift in the market’s perceptions was not temporary. “This trend will continue,” he said. Sukuk issuance volumes regionally as well as globally have already surpassed last year’s total, including Qatar’s issue, which was the largest-ever dollar-denominated sukuk and on which Deutsche Bank was lead arranger and bookrunner.

Global dollar-denominated sukuk issuance so far this year stands at $12.8 billion, according to Thomson Reuters data, the vast majority from the Gulf Arab region; total dollar sukuk issuance last year was $11.2 billion.

Deutsche Bank placed fourth in the Thomson Reuters Islamic debt capital markets league table rankings for the first six months of this year, up five places year-on-year. It is ranked third in the Middle East DCM ranking.

Maturities

Jaidah said that in addition to stimulating issuance, the new popularity of sukuk would permit issuers to lengthen tenors beyond the five years which was previously used for the vast majority of issues.

“Sukuk will be attractive for longer maturities, and used for infrastructure spending, for example. This is very encouraging. It will allow a lot of issuers on the conventional side to tap Islamic markets.”

Governments making plans for their debut issues of international sovereign sukuk include Turkey and South Africa, as well as other sub-Saharan African nations.

“Many nations are looking at issuing sovereign sukuk, even non-Middle Eastern nations. We think North Africa will also be very active when it comes to issuing sovereign sukuk,” said Jaidah, who was previously Qatar Islamic Bank’s chief executive.

“A lot of sovereign transactions will be more liquid. It’s an opportunity to create more liquid sukuk. This liquidity is an added attraction of the sukuk market.”

He declined to discuss specific mandates but noted that for first-time sukuk issuers, the process to enable them to print a deal can be a long one. “We’re focusing on readying potential issuers for sukuk. We’re exploring, we’re convincing, the clients are learning.”

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Corporate Issuance

Sovereign and quasi-sovereign borrowers from the United Arab Emirates and Qatar are among the most frequent Gulf issuers of debt; international corporate issuance from the Gulf has lagged. Partly because of the sukuk boom, however, Jaidah expects this to change.

This year, Dubai’s Majid Al Futtaim Holding, a rare investment-grade, private corporate issuer, has printed two debt deals, while Saudi Electricity Co sold a $1.75 billion sukuk in the first dollar-denominated deal from Saudi Arabia since 2010. Deutsche Bank and HSBC were mandated on that deal.

“We see corporate sukuk issuance as a trend. They will be medium-sized transactions but most of the family-owned corporates are exploring short- to medium-term funding options,” Jaidah said. “Kuwaiti banks may be an area of growth in future as none of the Kuwaiti banks have tapped the sukuk market yet.”

Although Kuwaiti corporates have been increasingly active in their domestic debt markes, international issuance has not been forthcoming. Deutsche Bank is also looking for opportunities to grow its Qatar business, which it considers an “anchor” country for the firm.

“The potential projects in the pipeline will demand more services,” Jaidah said.

source: Reuters