Corporate Financing Analysis - The Enduring Popularity Of Islamic Bonds - 21 AUG 2017


While it is not immune to the headwinds which have been swirling around the world of corporate finance over the last few quarters, the global Islamic bond market is on course to record its most active year for deals on record in 2017. According to Bloomberg data, Islamic bond issuance totalled USD71,183.9mn across the first seven months of 2017. This not only ranks as the largest haul of sukuk note sales on record by this stage of the year, but with five months of the year left to run it also leaves the market just shy of the record haul of issuance recorded across a single year period, which occurred last year when such deals tallied USD73,751.1mn globally. As such, by 2017 year-end, the sukuk market will have a new record high issuance, an occurrence which will serve to add further credence to our view that the bottoming out of crude oil prices would not put the brakes on the Islamic bond market ( see, ' Why The Sukuk Bond Market Activity Will Ignore Oil Price Drop ' , February 17 2016). More specifically, we believe that the global slump in crude oil prices, which began back in 2015 and saw the commodity drop to a post-financial crisis low, has weighed on - but has ultimately failed to deter - the growing level of interest in the so-called sukuk bond activity. Why so? Because the market for shari'a-compliant bond deal holds several strategic advantages over alternative means of financing amid times of market volatility. In particular, we point to the fact that sukuk bonds tend to carry shorter lifespans than other debt instruments and, as such, are far less exposed to changes in interest rates. In addition, we also highlight that the market is better protected against recent bouts of volatility and macroeconomic uncertainty owing to the fact that such deals originate from countries - be it from a sovereign state, a state-owned enterprise (SOEs), or a private issuer - which boast strong credit ratings. These nations include Malaysia, Indonesia, and a number of Gulf Cooperation Council (GCC) states such as Oman, Qatar, Saudi Arabia, Bahrain, and the United Arab Emirates (UAE). Within this set of countries, we highlight that the popular sukuk resorts of Malaysia and, to a lesser degree, Indonesia hold strong credit ratings. The former has been rated A by Fitch Ratings, A3 by Moody's and A- by S&P, while the latter has been rated BBB- by Fitch Ratings, Baa3 by Moody's, and BBB- by S&P. Meanwhile, all of the aforementioned GCC nations have a credit rating of, or above BB+ from Fitch Ratings, Ba2 from Moody's, and BB- from S&P. In sum, a combination of both the protection from volatility and the reduced exposure to changes in interest rates means that Islamic bonds typically provide both more reliable and higher returns than alternative fundraising avenues.

2018 Rate Hikes To Increase Sukuk Appeal

We believe that the market is set to enjoy a further boost in activity in 2018 when the US Federal Reserve is expected to embark on its interest rates heightening cycle once more. Indeed, the core view of BMI's Global Team is that the Fed will pursue an easier monetary policy than what it is currently signa l ling, with inflation and growth set to continue disappointing, forcing the central bank to back off from a rapid pace of rate hikes. In this vein, BMI's forecast is for no more hikes to be decided upon by the Members of the Federal Open Market Committee (FOMC) this year, but for the increases to kick start again in the new year with 50bps in both 2018 and 2019, putting us at a level of 2.16% (within a 2.00-2.25% range) by the end of 2019. When the Fed does make its move, we believe that it will almost certainly encourage other national banks to follow suit. In turn, this means that borrowing costs from lenders, both state-owned and otherwise, will likely step up a level - a move which will ultimately push issuers away from the loan market and towards arenas with more favourable borrowing terms, such as the sukuk market.

Sukuks On The Rise!
Global Islamic Bond Issuance By Deal Value, USDmn
Source: Bloomberg

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