The global sukuk (Islamic bond) market entered 2020 on the back of a strong year. Total worldwide issuance reached $162bn in 2019, up from $129bn the year before, according to credit ratings agency Standard & Poor’s (S&P). While the global market volatility introduced by the spread of Covid-19 in early 2020 has undeniably engendered greater uncertainty, the segment has strong growth potential; at the start of 2020 S&P forecast worldwide sukuk issuance would rise by 5% to reach $160bn-170bn by year’s end. In the GCC recent sukuk activity has been largely driven by expansionary government budgets: during a period of subdued oil prices, ministries of finance have tapped the world’s debt markets with greater frequency to help meet spending commitments. Given the renewed drop in international oil prices in early 2020, a return to looser fiscal policy could be in the offing. Although the UAE saw a marginal decline in new sukuk volume in 2019, this was largely attributed to corporates front-loading their issuance in 2018 in anticipation of less favourable market conditions the following year.
Abu Dhabi-originated sukuk played a prominent role in regional Islamic bond activity in 2019. First Abu Dhabi Bank, the UAE’s largest bank, was the first GCC issuer on the international sukuk market in 2019, with an initial offering of $750m that was raised to $850m in response to higher-than-anticipated orders. The bank followed this with a five-year, $500m sukuk issuance in January 2020. Meanwhile, Emirates Strategic Investments Company, an Abu Dhabi-based firm with interests in the aviation, property and financial sectors, made its debut sukuk offering on the London Stock Exchange in mid-2019. The fiveyear deal raised $600m with a 3.939% coupon rate.
Locally, the Abu Dhabi Securities Exchange (ADX) has benefitted from the relatively buoyant corporate sukuk pipeline. Fixed-income listings on the ADX have traditionally originated from the government or government-related entities, but corporate issuances have begun to make an appearance. A seven-year, $500m sukuk issued in 2018 by Aldar Properties was the first corporate sukuk listed on the ADX, and in 2019 the company listed another. The second $500m issuance has a tenor of 10 years and carries a coupon rate of 3.875%. There was high demand for the offering, which was six times oversubscribed and saw global investors capture a 71% share of the deal.
Although macroeconomic conditions are the primary determinant of the volume of sukuk issuance, other factors have a bearing on the deal pipeline. One such variable is the regulatory structure – an issue that was put into the spotlight as a result of the 2017 decision by Dana Gas not to repay $700m worth of Islamic bonds when they matured. The default, made on the grounds that the instruments were no longer sharia-compliant, resulted in court cases in Sharjah and the UK, where the courts ruled in favour of investors. The 2016 establishment of the federal Higher Sharia Authority offers the prospect of greater industry standardisation that would help prevent another such incident. New varieties of sukuk may also act as a fillip. The UAE was the first in the region to list a corporate green sukuk, a response to investors’ growing focus on environmental, social and governance (ESG) concerns. In July 2019 the ADX laid the groundwork for growth in this product line by introducing ESG guidelines for listed companies, which must now disclose ESG issues according to a set of 31 criteria. Financial technology is also likely to play a part in further sukuk issuances from Abu Dhabi. The adoption of tools that can be used via laptop or mobile phone is leading a shift away from traditional institutional investment patterns to a market where retail investors play a more active role. In the world of sharia-compliant debt, this involves a move towards micro-sukuk issuance, which is made possible by blockchain. The first of these instruments was issued in Indonesia in October 2019 and raised $50,000.
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