IslamicFinance.de

The Osun State government in southwestern Nigeria is planning to raise a sukuk bond worth 10 billion Nigerian nairas (some $62 million) from the capital market to fund infrastructural development. The state is awaiting final approval from the Security and Exchange Commission (SEC). The seven-year bond would be issued through a book-building process, which would earn returns for sukuk holders through a semi-annually paid rent structure called the Ijara. A local credit ratings agency, Agusto and Co, has given the note – to be listed on the Nigerian Stock Exchange – an A rating. The move as part of a 60 billion naira debt-raising program by Osun State, which started last year. The funds will be used to finance construction of education projects, among other development initiatives.

Pakistan's central bank has adopted the "investment sukuk" guidelines of the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). Issuers will have to comply with this global standard for sukuk, or face penalties. The action could help Pakistani issues attract investment by foreign institutions from the Gulf and elsewhere. Around the world, the industry commonly refers to AAOIFI standards but they are mostly used as guidelines rather than manadatory rules. Pakistan's regulators are rolling out new rules in an effort to increase Islamic banks' share of the total banking sector to 15 percent by 2017. In May, the country's securities commission established a sharia advisory board to oversee Islamic financial instruments, while last year it announced rules for sukuk, takaful (Islamic insurance) and Islamic deposits.

A report issued by KFH-Research states that the global sukuk market has shown resilience this year given the volatility in global bond markets as market players react to positive economic growth prospects as well as concerns over monetary policy in the US. The report mentions that sukuk issuances have kept up momentum with over US$26.6 billion placed during the second quarter, which adds to the US$34.5 billion placed during the 1Q13 to bring the first half total to US$61.2 billion. On a monthly basis, the primary sukuk market in 2013 has outpaced the previous year every month since January 2013 except June 2013. Furthermore, the report adds that the HSBC/Nasdaq SKBI Yield Index shows that overall sukuk yields have risen sharply in 2Q13, with an increase of 43.0% to the highest level in over 25 months.

A report issued by KFH-Research states that the global sukuk market has shown resilience this year given the volatility in global bond markets as market players react to positive economic growth prospects as well as concerns over monetary policy in the US. The report mentions that despite rising yields across the board, sukuk issuances have kept up momentum. On a monthly basis, the primary sukuk market in 2013 has outpaced the previous year every month since January 2013 except June 2013. Moreover, the report states that Malaysia held the largest market share of the primary market in 1H13 primarily due to the central bank issuances. The secondary sukuk market in Malaysia remained the largest, followed by Saudi Arabia, the UAE and Qatar. Growth in the secondary market over the first half of the year was driven by Turkey. The prospects for the sukuk market are expected to remain bright.

Saudi-based construction firm Binladin Group has completed a 1-billion-riyal ($266.7 million) Islamic bond sale. The transaction, structured as a sukuk al-murabaha, has a one-year lifespan and pays a profit rate of 2.5 percent. The Islamic bond was sold to a wide range of investor types including financial institutions, asset managers and insurance funds among others. Sources said last month that BNP Paribas and the investment banking arm of Gulf International Bank were marketing a deal for Binladin Group to Saudi investors, with proceeds to be used to fund its projects. The sukuk sale is the fourth carrying a 364-day tenor. Binladin Group has already completed one, longer-dated local currency sukuk in 2013. It priced the 1.3-billion-riyal Islamic bond with a 2.5-year lifespan, arranged by the investment banking arm of Banque Saudi Fransi , in April.

Islamic capital markets and Shariah-compliant insurance have so far developed separately. However, linking the two markets could cause momentum for both. A big constraint on sukuk market growth has been the product's lack of secondary liquidity. On the other side, the pool of investable money held by insurance companies is a big target for building capacity in the Islamic capital markets. One point of connection between sukuk and takaful markets is that every sukuk deal is backed by commercial assets which are covered by insurance. So far, sukuk issuers can also use conventional insurance for that matter. However, greater use of Islamic insurance would likely make it more efficient und thus, reduce rates.

South African power utility Eskom will look at new funding opportunities such as Islamic bonds to finance its capacity expansion projects. A lower than hoped for rise in power rates has left state-owned Eskom with an expected revenue gap of 225 billion rand ($22 billion) over the next five years. The associated decrease in projected revenues will materially affect operations, including ability to obtain funding for future capacity expansión. Funding for the next 12 to 18 months would be sourced from issuance of domestic and international bonds, export credit agency-backed financing, development finance institutions and the domestic commercial paper market. New opportunities from alternative funding sources and products such as Islamic funding (sukuk), preference share-type funding and project-based funding will also be explored.

Depressed initial public offering (IPO) activity in the Gulf Cooperation Council (GCC) continued into the second quarter (Q2) of 2013 with three new listings raising a total of only $ 48 million. This compared to two IPOs in Q1, 2013 raising an aggregate of $ 337 million, representing an 86 percent decrease in total value raised. The average offering value dropped 94 percent this quarter compared to the same quarter last year where four IPOs were witnessed raising a total of $ 1.1 billion. While the value of offerings significantly dropped this quarter, the number of offerings remained relatively stable at 3 IPOs. In contrast, Europe’s IPO markets have continued to gain momentum in Q2, building on the successful start to the year, with $ 6.8 billion being raised, a 58 percent increase on the $ 4.3 billion raised in the first quarter of 2013.

Ahmed Al-Gabali, Technical Advisor for Islamic bonds at the finance ministry. temporarily left his post at the Ministry of Finance due to his conviction that not enough political and economic support currently exists to push Egypt’s Islamic bonds law. This, he said, will cause returns on any Islamic bonds that are issued to be significantly less than previously estimated. He stated that the fate of Egypt’s Islamic bonds law changed after the events of 30 June and the ouster of former president Mohamed Morsi. He maintained, however, that Islamic bonds would remain a powerful finance tool in the future, since sukuk have existed in a number of countries that do not operate under an Islamist or a Brotherhood regime. Abdullah Al-Adali, chairman of the taxes division at Price Waterhouse Coopers, stated that he supported keeping the country’s Islamic bonds law as it was despite the removal of Morsi.

JPMorgan Chase & Co. is advising clients to buy Nakheel PJSC’s Islamic bonds as new projects boost the Dubai developer’s earnings, while government backing makes a default improbable. State-run Nakheel’s 4.27 billion dirhams ($1.2 billion) of sukuk yielded 9.88 percent at 12:30 p.m. in Dubai, down seven basis points this month, after surging 179 basis points in June. That’s more than twice the average gain in yields on corporate Islamic debt tracked by HSBC/Nasdaq Dubai indexes. JPMorgan listed Nakheel in a July 4 research note as its “top overweight recommendation” among Dubai real-estate debt. Nakheel will manage to pay or refinance as much as half of the $3 billion of debt due in 2016 as it generates at least $1 billion from new projects and land sales.

Franklin Templeton Investments and ECM Libra Financial Group Bhd say they are favouring Malaysian corporate sukuk, which has outperformed as the Federal Reserve considers ending stimulus. Corporate sukuk benefits from a higher degree of scarcity than for government debt. Sales of Malaysian-currency Islamic bonds fell 63 per cent to RM19.9 billion in 2013 from the year-earlier period, worsening the lack of supply. Company bond offers in the Southeast Asian nation, including sukuk and non-Islamic notes, will total RM70 billion to RM85 billion in 2013. However, corporate bond market issuance is expected to remain relatively strong in the second half as the yield curve will likely steepen beyond 2013. Malaysian corporate sukuk are considered less volatile and they provide some yield pick-up over government bonds.

Issues like rating requirements, cost of issuance and complexity of documentation meant that capital raising through sukuk is predominantly by larger corporations and entities. This means that sukuk offer no opportunity for direct investments by retail investors. In order to facilitate greater direct retail participation in the corporate bonds and sukuk market, the Securities Commission Malaysia in 2012 developed the framework for retail bonds and sukuk as envisaged under the Capital Market Masterplan 2, enabling retail investors’ access to a wider range of investment products. However, there are several challenges. One area that requires considerable effort is investor education. Although the new approach may not achieve overnight success, it will help widening access to the capital market and ensuring that Islamic finance takes the path of inclusiveness.

Amanie Advisors Australia Pte Ltd, which is part of the Malaysian Amanie Advisors Group, has proposed to raise multiple short-term sukuk to cover Australia’s manufacturing ecosystem as part of the strategy to win funds from the Gulf area. Amanie founder and group chairman Dr Mohd Daud Bakar said the structures used in Islamic finance transactions mirror very closely the types of funding that are currently in demand in Australia, particular with respect to real economic activity which include leasing, financing of mining activities and farming. Amanie's idea involves funding from the whole value chain of any business, for examples electricity production. This is a totally new way of approach in the Islamic finance industry, which seems to have been well accepted in Australia. The short-term sukuk will involve the banks in the value chain, reduce the dependency of farmers and producers from conventional or private funds though the risk is quite high but the third party acts as the underwriter.

Noor Islamic Bank has completed Islamic capital market mandates valued at over $1.4 billion (AED5.14 billion) in the past six months in Turkey. As an Initial Mandated Lead Arranger and Joint Bookrunner, Noor successfully closed a $500 million equivalent dual-currency Murabaha facility for Türkiye Finans Katilim Bankasi, which was oversubscribed two times. Noor Islamic Bank has also been an Initial Mandated Lead Arranger and Joint Bookrunner for a $382 million dual currency Murabaha Facility for Asya Katilim Bankasi A.S (Bank Asya) and a $500 million Sukuk for Tukiye Finans Katilim Bankasi A.S. In total, 85 banks and financial institutions across Asia, Middle East, Africa and Europe have participated in the syndicated financing deals led by Noor this year.

Some firms are starting to combine sukuk, using portfolios of long-term issues to back short-term certificates. This lets them create liquidity programmes that address the persistent shortage of money market instruments needed by Islamic banks to manage their short-term funds. Such is the approach used by Bahrain-based Liquidity Management Centre (LMC). The programme is uses an SPV (special purpose vehicle) where all the sukuk are booked. The SPV is fully backed by sukuk of different tenors and rates. A similar format is to be used by the Malaysia-based International Islamic Liquidity Management Corp (IILM), where all of the assets will be either sovereign, sovereign-linked or supranational assets. If these programmes gain traction they could open the door to additional layers of securitisation.

Nakheel's sukuk yields spiked yesterday, as the developer discusses its options on how to refinance its upcoming debt repayments. Yields for the developer on its Islamic bonds maturing in 2016 hit their highest level since November last year. Analysts said investors were responding to a lack of information over progress with the company's refinancing discussions with lenders. The recent sell-off may have hurt bond investors, but borrowing costs have returned to about the same levels as recently as nine months ago, meaning most issuers would have few difficulties selling new debt if they needed. Funds tracking the HSBC/Nasdaq Dubai UAE US dollar sukuk index have lost money this year, with total returns down 2.7 per cent year to date.

Investors in Islamic bonds are losing money for the first time in more than three years in the second quarter as concern that the US Federal Reserve will withdraw monetary stimulus upended a rally that returned 33 per cent. Redemptions from emerging-market bond funds hit a 90-week high in the week ending June 19. Sukuk had benefited from a boom in Islamic finance, with Ernst & Young forecasting a surge in the industry's assets to US$1.8 trillion this year from US$1.3 billion in 2011. In January, syariah- compliant yields fell to a record low before a 57 per cent jump to date, linked largely to speculation that the Fed will scale back its bond buying as the US economy improves.

Oman’s first corporate sukuk has received regulatory approval and the five-year, RO50m ($130m) private placement aims to close next month. It will be issued by Tilal Development Co and the proceeds will be used to repay existing debt and expand the Muscat Grand Mall. The sukuk, rated BBB+ by Capital Intelligence, will pay a five percent profit rate and use an ijara structure, a common Shariah-compliant leasing arrangement. Omani domestic investors such as pension funds and insurance firms have expressed interest in the sukuk and it could have a broader regional appeal, in particular from Qatar. A corporate sukuk could also be welcomed by local Islamic banks, which are eager for access to more sharia-compliant investment products while Oman’s Islamic money markets are underdeveloped.

Barring any unforeseen circumstance, Osun State will issue Nigeria's first Sukuk bond of N10 billion before the end of July. The planned 7-year paper would be part of a N60 billion debt raising programme of the state which started last year. The Osun bond will be issued through a book-building process which will earn a return for sukuk holders via a semi-annually paid rent structure called the Ijara. The government is targeting local pension funds and international investors on the bond. Local credit rating agency Agusto & Co has assigned an A rating to the note, which will be listed on the Nigerian Stock Exchange. Osun is waiting for the Securities and Exchange Commission’s (SEC’s) approval to start marketing the bond. The funds will be used to finance the construction of education projects.

Sukuk sales in 2013 will pick up speed to beat last year’s record because of the relative resilience of Islamic debt to surging global bond yields, said HSBC Holdings plc and Deutsche Bank AG, the top two underwriters. Issuance will reach US$55 billion to US$60 billion (RM191.88 billion), from US$46.5 billion in 2012. The prospect of the Federal Reserve tapering its monetary stimulus has pushed the average yield on global sukuk up 68 basis points this month to 4.06% on Monday. That compares to an 110 basis point increase to 6.17% for emerging-market debt. The Shariah market has many “buy-and-hold” investors, reducing price swings. The high borrowing costs in the conventional markets contributed heavily to the current growth of Shariah-compliant sales.