The Sukuk Opportunity
Total Sukuk issuances for 2013 stood at approximately US$120 billion and the Sukuk market is likely to sustain double-digit growth in the coming two to three years with assets in Islamic finance expected to reach US$2.8 trillion by 2015.
The growth of the Sukuk market has allowed investors to diversify their portfolio and invest in credit that they would not otherwise have access to, such as Islamic institutions, which only raise funds in aShari’ah-compliant manner. The future of the Sukuk market is one of innovation, where new assets, structures and markets continue to create new opportunities for investors. Based on our experience and deal flow from 2013 and first half of 2014, we expect to see four main trends continue to develop in the Sukuk market, namely:
- Longer Term Funding: The financial crisis generated greater awareness in the Middle East on the advantages of longer term funding options. Historically, market perception assumed that getting conventional investors in the US to invest in long-term Sukuk would be time-consuming and a largely unsuccessful endeavour. However, Saudi Electricity Company successfully issued the world’s first international 30-year Sukuk in April 2013, which was issued to investors in the US pursuant to Rule 144A of the Securities Act 1933, as amended, which has provided assurance to the market that US investors are becoming increasingly willing to invest in longer term Sukuk. The success and volume of interest shown by global investors in the inaugural 30-year international Sukuk of Saudi Electricity Company and the subsequent 144A Sukuk issuance by the company in April 2014, means that these issuances will no doubt be replicated by other companies in the Middle East and Asia seeking to obtain longer term financing.
- Issuance of Innovative Sukuk Instruments: Abu Dhabi Islamic Bank kick-started this innovation when it issued US$1 billion worth of additional Tier 1 capital certificates in 2012, representing the world’s first Basel III compliant Tier 1 Sukuk issuance. This ground-breaking issuance has paved the way for other banks in the Middle East and Asia, bothIslamic and conventional, to follow their lead and has shown that Sukuk issued for the purposes of capital raising can generate significant investor demand among both conventional and Islamic investors. Most recently, Latham advised Banque Saudi Fransi on its SAR2 billion Tier II Sukuk issuance through a private placement in the Kingdom of Saudi Arabia.
- Increased Use of Intangible Assets: Ooredoo successfully issued US$1.25 billion Shari’ah-compliant Sukuk under its US$2 billion trust certificate issuance program, the first Sukuk issued in the Middle East that utilized an innovative “airtime” Sukuk structure. The transaction signifies the market’s increasing acceptance of intangible assets as the basis for Shari’ah-compliant Sukuk issuances and signifies a rapidly evolving market for Shari’ah-compliant products in the Middle East. The increased use of intangible assets in Sukuk structures should serve to widen both the base of issuers, and the frequency with which they can access the Sukuk market.
- Growth in Cross-Border Sukuk: Gulf issuers are beginning to tap into Malaysia’s highly liquid Sukuk market, the world’s biggest Sukuk market which accounts for appropriately 65% of all Sukuk issuances. Al Bayan Group Holding Company was the first Saudi issuer to issue a Ringgit denominated Sukuk, with the issuance of RM200 million Sukuk Wakalah due 2016 under a RM1 billion Malaysian Ringgit Sukuk Programme. The ringgit is fast becoming a growing, credible alternative to the US dollar for non-Malaysian issuers. This trend is facilitating more interdependence between the Asian and GCC Sukuk markets as GCC issuers look to benefit from Malaysia’s large and diversified pool of investors and available liquidity.