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New issuances in global sukuk record strong growth in 1H14

A newly released report “Global Sukuk Report 1H2014”, by Kuwait Finance House Research Limited (KFHR), analyses the developments and key drivers of the sukuk market in the first half of this year. To date, the volume of sukuk issuances has increased significantly, supported by traditional jurisdictions and a resurgence of issuances from the corporate sector. In addition, 1H14 saw the launch of several landmark sukuks, which augurs well for the development of a diverse global sukuk market.

New issuances in global primary sukuk market recorded strong growth in 1H14, expanding by 8.2% to reach $66.2bln (1H13: $61.2bln). After a moderate 1Q14, issuances surged towards the end of 2Q14, just prior to the Ramadhan period. During 2Q14, a total of $35.1bln of new sukuks were issued (1Q14: $31.1bln; 2Q13: 26.7bln), which is the third highest quarterly figure on record since the 2Q12. Apart from the traditional Islamic finance hubs of the Gulf Cooperation Council (GCC) and Malaysia, the surge in sukuk volumes were also driven by noteworthy sukuk deals in other domiciles including Turkey, Pakistan and the United Kingdom. Among the most prolific issuance in 2Q14 is the debut GBP200mln sovereign sukuk issuance by the United Kingdom, making it the world’s first non-Organisation of Islamic Cooperation (OIC) jurisdiction to issue a sovereign sukuk.

 
Overall, sukuk issuances were geographically-diverse, with obligors based in a total of 11 jurisdictions tapping the primary market in 2Q14 (1Q14: 13 jurisdictions). Malaysia continued to account for the largest market share, accounting for 63% or $41.7bln of the total global new sukuk issuances in 1H14. A rebound in sukuk issuances during 2Q14 has enabled the GCC primary market to now account for an increased 26.7% market share or $17.7bln of the total global new sukuk issuances in 1H14 (1H13: 23% or $14.1bln).
 
Amidst these high volumes, the sukuk market was tapped by an increasingly diverse range of issuers, with a total of 244 sukuk tranches in 1H14. In terms of issuer type, sovereign issuers continued to lead the market in 2Q14 with an issuance volume of $20.6bln (1Q14: $21.37bln). Nevertheless, improved performance was recorded in the corporate sukuk sector which accounted for a sizeable 27.1% ($9.5bln) share of the primary market in 2Q14, compared to 18.4% ($5.7bln) in the previous quarter. As a result, corporate sukuk issuances recorded their second highest quarterly performance in 2Q14, in the last two years since 1Q12. 
 
By sector, the government issuers continue to account for the majority of sukuk issuances, although its share has relatively declined in 1H14, accounting for a 58% share compared to the above 60% shares annually in the last few years (2013: 62%; 2012: 61.8%). Excluding the sovereign and related entities, corporate issuances were mainly from the financial services, real estate and power and utilities sectors. Issuances by the financial services sector has expanded significantly, with a 21.4% contribution in 1H14 (2013: 10%; 2012: 11.4%), underpinned by Islamic banks’ need to raise capitalisation funds in order to comply with the Basel III standards. During the 2Q14, Malaysia’s largest takaful company (in terms of contributions) issued the world’s first takaful sukuk worth RM300mln. The issuance was a unique offering, as typically insurance companies and takaful operators are investors in bonds and sukuk market instruments, while in this case a takaful company acted as an issuer. In addition, Malaysia’s AAA-rated entity KLCC REIT, issued a rare real estate and investment trust (REIT) sukuk raising MYR1.55bln. Furthermore, at least six Basel III compliant sukuk instruments were issued by Malaysian Islamic banks collectively raising MYR3.25bln. 
 
In the secondary market, global sukuk outstanding expanded by 5% q-o-q to reach $286.41bln as at 1H14 (1Q14: $272.96bln and a 1.3% growth q-o-q). This represents a 6.3% growth in outstanding volume in 1H14 (end-2013: $269.4bln outstanding) and a 16.8% growth y-o-y since 1H13 (1Q14: 15.96% growth y-o-y). The three leading domiciles are Malaysia, Saudi Arabia and the United Arab Emirates (UAE). Of these, Malaysia remains as the sole secondary market with sukuk outstanding volume over $100bln. As of 1H14, Malaysian sukuk outstanding amounted to almost $164bln, a 4% increase compared to the $158.3bln outstanding as at end-2013. Saudi Arabia’s sukuk outstanding volume amounts to $47.8bln (2013: $38.6bln), a notable 24% growth in volume in 1H14. Elsewhere, sukuk outstanding in the UAE had increased by 15% since end-2013 and its outstanding amounts to $25.7bln in 1H14 (2013: $22.3bln). Overall, the GCC market experienced a 9% increase in outstanding value since end-2013, totalling $92.9bln in 1H14 (2013: $85.3bln).
 
In terms of returns on sukuk papers, secondary market yields were partly driven by expectations of interest rates and quantitative easing in the advanced economies. Yields on sukuk instruments had generally eased across the main sukuk markets (GCC, Malaysia, Turkey) in the first two months of 2Q14 before experiencing upward volatile movements in June, ahead of the US Federal Reserve’s Federal Open Market Committee Meeting (FOMC) on the 17th and 18th of June. A slew of positive US economic data released ahead of the FOMC meeting led many market participants to believe that the Federal Reserve is likely to be more confident in adopting a hawkish tone during its June meeting.
 
However, following assurances by the US Federal Reserve that the US interest rates is likely to remain unchanged for a considerable time after the quantitative easing programme ends this year, the markets calmed and yields generally eased. Overall since end-2013, sukuk yields have eased across the main markets. This is a positive development as it points to a return in investor confidence in the markets, following the emerging market funds outflow crisis which had sent yields spiralling on fixed income instruments in these countries. 
 
Overall, the robust expansion in the primary market during 2Q14 has supported expectations that the annual new issuance volume for 2014 is on track to overtake last year’s volume of $119.7bln. The outlook for the global sukuk market remains positive as the number of jurisdictions, multilateral bodies as well as categories/sectors of issuers tapping the Islamic debt market continues expanding. In the second half of 2014, debut sovereign issuances are expected from Luxembourg, Hong Kong, Senegal and the Emirate of Sharjah. Future debut sovereign issuers based on announced plans include Tunisia, South Africa, Oman, Jordan, Egypt and Mauritania. The geographical expansion was augmented by sector-based expansions, lending further credence to a healthy and vibrant global sukuk market.
 
In 1H14, Malaysia’s Etiqa Takaful issued the world’s first takaful sukuk while the Saudi fashion retailer, Fawaz Alhokair Group, also issued its maiden sukuk. Similarly, sukuks are also increasingly being utilised by the financial sector as tools for satisfying regulatory requirements — for example by issuing Basel III compliant AT1 and Tier 2 sukuk instruments. This year has also witnessed substantial efforts being directed by global multilateral entities, such as the World Bank and the Asian Development Bank, towards enabling sukuk to serve as viable tools for meeting diverse global liquidity needs. Going forward, it is expected that 2014 will be another record-breaking year for primary market issuances.
 

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