Islamic bond market to remain buoyant
MANAMA (Reuters) - Islamic bond issues, which have outpaced the conventional bonds industry in recent months, should continue to show strength into the first quarter of 2012 as borrowers seek better pricing and alternative funding amid the global debt crisis, Islamic bankers said on Monday.
Both conventional and Islamic institutions, as well as global sovereigns, have been flocking to the Islamic bond, or sukuk, market, creating an unusually active fourth quarter. Debt woes in Europe and a rush to the market before the window for issuance closes ahead of the holidays have intensified activity, but it should regain momentum in the first quarter.
"The first quarter will continue to be a busy one for sukuk as those issuers that have been put on hold right now will want to come back into the market," said Iza Kamaludin, associate director of debt capital markets at HSBC Middle East.
"We're already starting to see people close their books with investors telling us that they are starting to see investment fatigue from all of the recent issuances."
Some debt issuers are finding it cheaper to raise money through sukuk than through conventional bonds, as strong demand and limited supply means there is liquidity to deploy.
The demand has helped to make the secondary market in sukuk more stable than conventional bonds during the global financial turmoil of the past few months.
In the past few weeks, financial institutions from Turkey to Dubai have tapped Islamic liquidity with success. Kuveyt Turk raised $350 million in an asset-backed sukuk, with orders totalling $550 million, while Abu Dhabi Commercial Bank ADCB.AD raised $500 million from a book of $1.4 billion in orders.
Sovereigns have also come to market with Bahrain pricing a $750 million sukuk at a profit rate of 6.237 percent while Indonesia's long-awaited $1 billion sukuk priced at 4 percent, tighter than guidance of 4.25 percent.
But frenzy over sukuk will likely normalize after the first quarter as the stream of Islamic issues tightens the spread between conventional and Islamic pricing, said Simon Eedle, managing director at Credit Agricole. (CAGR.PA)
"Pricing is cheaper now but that's a short-term phenomenon. As more people come to market, you will see more equilibrium going forward," he said. "I think you will see sukuk issuance will be a lot more normalised after the first quarter."
Eedle said the first quarter will also benefit from international and emerging market funds that will look to make investments early in the year, driving more activity among issuers.
While regional financial institutions and sovereigns will continue to dominate sukuk issuance, there may be increased interest among Western institutions to tap the Islamic market, bankers said.
General Electric (GE.N) was the first Western corporate to issue a sukuk in 2009 but there has been little activity among international players since. HSBC's successful $500 million sukuk earlier this year and Goldman Sachs' (GS.N) $2 billion sukuk programme last month, however, is sparking interest among other Western financial institutions.
"I think we might see more Western banks coming into the market next year as liquidity has dried up in the West with the financial crisis," said Kamaludin. "It will come down to the question of whether they already have an affinity for the Gulf region and at the end of the day people want to know that the proceeds of a sukuk are going into something sharia-compliant."
Despite interest among Western institutions, near-term challenges will keep issuance by international players from aggressively tapping the market, said Belaid Jheengoor, director of PriceWaterhouseCoopers.
Jheengoor said a lack of qualified Islamic professionals in the West, ongoing tax implications and concerns over high-profile sukuk defaults or near-defaults will raise obstacles for issuance in the near future.
(Editing by Jon Loades-Carter)
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