Upheaval in global markets is likely to further delay a major pickup in sukuk issues until the third quarter, experts say. At present, issuers in the Middle East and south Asia have a small window of opportunity if they want to issue before summer, when business slows and almost stops during Ramadan. This means debtors would have to start the process in earnest in the next weeks, which looks unlikely given the market turmoil related to Greece.
"There will be no new jumbos in this region until stability returns. The [sukuk] market will not pick up until after Ramadan," said Nida Raza, the senior vice president for capital markets at Bahrain's Unicorn Investment Bank. "People won't concentrate on sukuk right now. What is going on in Europe will take the traction away." Worries that the Greek debt crisis may spill over to other parts of Europe and resulting market volatility have already led to a sharp drop in new corporate debt this month. Borrowers worldwide sold US$15 billion (Dh55.09bn) of corporate debt in the first two weeks of the month, down 62 per cent from the first two weeks of last month, according to Bloomberg data. Investors underwriting such debt have also asked for far more interest.
"There are definitely issuers who are interested in tapping the markets. But they must come together with investors. They are definitely beginning to come out of their frozen state but if we see a double dip, that would affect the [sukuk] market," said Ahsan Ali, the head of Islamic origination at Standard Chartered Saadiq, the bank's Sharia-compliant unit. Mr Ali said Standard Chartered alone could facilitate the issuance of about $4bn of sukuk.
Bankers say they have been preparing sukuk but fear these may be held back until the situation in Europe calms down. Mohammed Dawood, the director of capital markets at HSBC Amanah, said the bank's potential sukuk issues look "absolutely healthy with a large number of mandates". HSBC Amanah is HSBC's Sharia-compliant banking unit. Ms Raza is equally confident that this year's global sukuk issuances could come in at about $8.5bn, more or less at last year's level. But that would be down from about $14bn worth of sukuk in 2008 and $40bn in 2007.
"2010 has started more quietly," said Andrew Leamon, a director of global transaction banking at Deutsche Bank. "There are deals in the pipeline but the question is, can they come to the market in this environment? "If they have not been issued by the end of May, they may be held until later in the year." Sukuk issues in the Middle East have been limited so far this year. Last week's 7 billion riyal (Dh6.85bn) issue by Saudi Electricity Company, a state-owned utility, was four times oversubscribed. In February, Dar Al-Arkan , a Saudi property company, issued a $450 million sukuk at 11 per cent profit, the Sharia-compliant equivalent of interest.
Bankers point to a healthy appetite among regional investors but question whether this will be enough to spark new issues. Regional financial institutions alone must refinance between $25bn and $30bn this year, and banks say they are scrambling for alternatives to "parking" their money with the central banks for pitiful returns. Separately, recent controversies over the restructuring of sukuk and the rights of creditors in case of defaults may have added to the slowdown in momentum in the sukuk market.
"We have not seen any mega sukuk so far this year, but nor have we seen any mega conventional issues," Mr Ali said. "There was a lot of bad publicity and uncertainty associated with sukuk but I would say that it is primarily driven by market issues." The Investment Dar, for example, a Kuwait-based investment company that defaulted on a $100m sukuk, shocked investors when it refused to repay one of its creditors, Lebanon's Blom Bank, arguing that the original deal did not comply with Islamic law.
The sukuk market remains small compared with the market for conventional bonds. This is despite the fact that it has evolved rapidly in recent years. With more than $100bn outstanding, the sukuk market accounts for about 1 per cent of the conventional debt market. That makes it comparatively less liquid, which can cause already jittery investors to stay away. But there have been some pockets of activity in Malaysia and Saudi Arabia. Both markets have their own dynamics. They issue sukuk mainly in local currencies to soak up excess liquidity.
Meanwhile, market access as well as settlement issues continue to be complicated in Saudi Arabia. @Email:email@example.com