Sukuk issuance is continuing to be limited and well below its 2007 peak. However so far 2010 has seen many more issuances than the same periods of 2008 or 2009. Apart from in Malaysia most institutional investors are acquiring the Sukuk to hold to maturity rather than trade, as the market remains largely inactive in the GCC, apart from a few deals in Riyadh in the Saudi Basic Industries Corporation and Saudi Electricity Sukuk. Most Islamic bank liquidity in the GCC is either held in central bank deposits or in Murabahah inter-bank deposits. It seems old habits prevail and during challenging financial times there is a reluctance to explore new options. This may change as the recommendations on liquidity of the Basel Committee on Banking Supervision are implemented, but this is likely to take years rather than months.
PROFESSOR RODNEY WILSON
Many Islamic issuances are in the pipeline and have been delayed due to the recent credit crisis. The anticipated UK sovereign Sukuk will encourage many other western countries to look at Sukuk issuance for financing needs. Here in Canada at a preliminary levels many government agencies have already commissioned internal reports looking at the feasibility of issuance of potential Sukuk. At the moment with the Sukuk market at about $100 billion the market needs to grow further to enable larger treasury to look at conversion of its current investment grade investment. OMAR KALAIR President and CEO, UM Financial Canada
Yes, there is a lot of cash available from Islamic treasuries. But, selling in this market is tough. The buyers will only buy Sukuk that are liquid, and if not they want a yield premium. I tried to sell the small US$51 million Thomas Cook Sukuk in April. The Placement Agent was Wasatah Capital in Riyadh. They insisted on a 7% yield and a Saudi-only distribution policy. That doomed the deal. Despite the entire market loving these Sukuk they just couldn’t sell. Why? Because Wasatah misjudged the market. The market required at least 8.5% to make up for the lack of liquidity. Wasatah didn’t do its homework. Liquidity was and remains king.
JOHN A SANDWICK Islamic Wealth & Asset Management, Geneva, Switzerland
Although important, the availability of liquidity is not the only factor in the decision on whether to issue a financial instrument. Equally important are the requirement for liquidity from the issuer and the pricing. Many corporations are currently reviewing their strategic plans, current structure and current operations. In combination with the (still) rather uncertain economic circumstances, it should not be surprising that the issuance of financial instruments is being postponed. In addition, the majority of new issues in the first six months have been by governments or are government related. Given current market circumstances, these lower risk issues may attract investors whereas corporate issues may not be in a similar position given the increased risk associated with such offerings. DR NATALIE SCHOON Head of product research, Bank of London and the Middle East
In a context of poor economic growth prospects, companies are concerned about the sustainability of their existing capital structures. Whether in the conventional or Islamic sphere, corporate issuers are probably more focused on meeting or restructuring their current obligations than on expanding them. Cash-flow expectations are likely to disappoint over the next one-to-three years just about everywhere. Chief financial officers are broadly unwilling to put any limited revenue gains at risk, irrespective of the money available to absorb new issues. Risk-aversion plays out in secondary markets with low volumes; it plays out in primary markets with low issuance. This sort of macroeconomic environment is somewhat unknown to the Islamic finance community, which came of age in a very different setting. It suggests the tenor of the industry will shift to less expansive and more responsive. Certainly origination will no longer be the sort of profit center it has been, for the foreseeable future.
DOUGLAS CLARK JOHNSON CEO, Codexa Capital
|