Despite geopolitical tensions and rising interest rates, the global sukuk market remained resilient in 2022. Sukuk activity was robust, with the number of issues rising to 208 last year from 179 in 2021, based on Refinitiv data. However, the value of issuances declined to US$47.07 billion, from US$54.31 billion in 2021.
Similar to the conventional bond market, there was a significant decline in foreign-currency-denominated sukuk due to lower and more expensive global liquidity. In the United Arab Emirates, for example, challenges around the adoption of AAOFI (Accounting and Auditing Organization for Islamic Financial Institutions) Standard 59 have contributed to the drop in the value of foreign-currency sukuk issuance to around US$4 billion per year in 2021-2022, from around US$10 billion per year in 2018-2020.
This has opened opportunities to develop the local currency market for active issuers, with the UAE launching a dirham-denominated Islamic treasury sukuk of a benchmark auction size of 1.1 billion dirhams (US$299 million) this year.
“Especially with the US dollar peg and the UAE being an international hub, a company or an issuer could just tap US dollar and they could have access to local investors as well as international investors. The dirham sukuks are being done to establish a yield curve and also provide an alternative investment for the local banks to invest in,” explains an Islamic finance banker. “The sovereign is just providing a framework or a platform to issue in dirham which can be referenced to the sovereign curve which companies could price off on.”
Outside of the Gulf Cooperation Council (GCC) countries, sukuk activity in the developed local currency Malaysian and Indonesian markets has been relatively active with issuers continuing to tap the market and engaging with investors who are looking to forgo the costly international bond market.
Pricing between conventional and Islamic fixed -income instruments was similar as well. According to Fitch Ratings, the pricing of most comparable sukuk and bonds continued to be highly correlated in 2022 with bond prices often falling more than their sukuk counterparts.
“This stems from sukuk being less liquid than bonds in general, owing to the buy-and-hold nature of most sukuk investors, which are mainly Islamic banks. We expect this trend to continue in 2023,” the rating agency states in a commentary.
Like in previous years, sustainability continued to play a significant role in further growing the Islamic finance industry as more issuers sought to showcase their environmental, social, and governance (ESG) credentials via green or sustainability sukuk. While still in development, sustainability-linked sukuk, where pricing is based on whether the issuer hits certain ESG targets, is also raising much interest in the market.
“The increasing focus on sustainability-related themes by core Islamic finance players will create new opportunities for the industry. We expect the contribution of sustainability-linked sukuk to continue increasing in the next 12-24 months, albeit from a low base,” says a S&P Global Ratings report.
These were some of the themes and trends in dealmaking observed by the board of editors for The Asset Triple A Islamic Finance Awards 2023. During the review period, the board was presented a number of market-defining deals that helped develop the Islamic finance market last year.
These included some notable deals in Southeast Asia such as the Republic of Indonesia’s US$3.25 billion global sukuk which included the largest green sukuk tranche printed globally. That deal experienced significant demand with the final order book reaching US$10.8 billion across more than 200 accounts.
In neighbouring Malaysia, another notable deal was Amanat Lebuhraya Rakyat’s sustainability sukuk amounting to 5.5 billion ringgit (US$1.17 billion). The deal adopted a two-pronged pricing approach where callable tranches were privately placed to identified investors, one day ahead of the book building for the vanilla tranches. It was the first highway-related ESG sukuk showcasing how different sectors were looking at ESG options in their fundraising strategy. Proceeds will be used to finance the acquisition of four existing highway concession companies and refinance their existing funding facilities.
Over in the Middle East, several notable deals stood out. These included Riyad Bank’s US$750 million sustainable AT1 Reg S sukuk. It was the first-ever global issuance of an AT1 sustainability sukuk and was executed against a volatile background. Nonetheless, the deal achieved a spread tightening of 37.5bp from initial price thoughts of 4.375%. It was the lowest-ever credit spread by a GCC bank AT1.
Arada Developments was also cited for its US$350 million debut sukuk offering and US$100 million tap. The property development company was the first corporate sukuk issuer in Sharjah in the past five years. It was able to achieve a high-quality order book, being the first MENA sub-investment-grade US dollar issuer in 2022. Arada was the first property developer in the region to receive a direct rating uplift from Fitch Ratings based on implied government support.
Outside of the capital markets, Islamic finance continued to make inroads in trade finance with a growing sentiment among companies to deploy Islamic structured solutions for post-shipment import financing or even supply chain financing. UEM Edgenta, for instance, crafted the first Islamic supply chain finance programme in Malaysia to supports vendors with lower financing cost.
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