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Sovereign issuers drive the market as corporate issuances stall; Senegal becomes the latest debutant in the global sukuk market

Sovereign issuers drive the market as corporate issuances stall; Senegal becomes the latest debutant in the global sukuk market

• The outlook for the global sukuk market remains promising and it is expected that 2014 may turn out to be another record breaking year that may overtake 2012’s volume of USD131.2bln

• The global primary market volume has reached USD74.15bln in seven months ended July 2014, an increase of 6.8% y-o-y
• The Government of Senegal issued its inaugural sovereign sukuk

The global primary sukuk market issuances amounted to USD7.95bln last month, a 31.4% decline month-on-month (m-o-m) compared to the USD11.6bln volume in June. The subdued volume comes as corporate issuances stalled in July on account of the Islamic month of Ramadan. Corporate issuers throughout the global markets remained absent from the primary market with the exception of few corporate sukuks issued in Malaysia and a sole corporate sukuk issued in Indonesia. Collectively, these corporate sukuks produced a volume of USD1.16bln or less than 15% of the new issuances market share in July as compared to the bumper USD5.24bln volume or 45.3% market share in June.

On the other hand, the sovereign and quasi-sovereign issuers steered the market with a USD6.79bln volume or 85.4% primary market share (Jun-14: USD6.34bln or 54.7%). Notably, the two global Islamic finance mandated multilateral entities, the Islamic Development Bank (IDB) and the International Islamic Liquidity Management Corporation (IILM) tapped the market in July, raising USD1.86bln. The IDB issued a USD1bln tranche on 17th July in a privately placed transaction as part of its upsized USD10bln medium-term note programme which it had announced and received approvals for last year. The latest issue marks IDB’s third issuance this year following the USD1.5bln publicly-listed tranche in March and a privately placed USD100mln tranche in April. Meanwhile, the IILM issued its third USD860mln tranche, as a re-issuance for the second tranche of the same volume issued earlier in April this year and that matured on 23rd July. This latest issuance marks IILM’s seventh issuance to date since its inaugural issuance in August last year. The reissuance maintains IILM’s total short term sukuk outstanding portfolio at USD1.35bln.

However, the most important limelight of the month lies in the debut of the Sub-Saharan African nation of Senegal in the global sukuk market. The Government of Senegal priced its maiden sovereign sukuk deal on 18th July, worth West Africa CFA Franc (XOF) 100bln which is equivalent to approximately USD200.5mln.

Overall, the global primary market volume has reached USD74.15bln in seven months ended July 2014 (7M14), 6.8% higher than the USD69.42bln volume in 7M13. Despite a decline in corporate issuances in July, sovereign and quasi-sovereign issuers have steered the market to ensure 2014’s annual issuances to date remain on track to overcome last year’s annual issuances volume of USD119.7bln.
Analysing by the country of sukuk origination, the primary market activity was heavily concentrated in Malaysia which accounted for 80.6% or USD6.41bln of the total new issuances in July (Jun-14: USD6.1bln or 52.8%). The Malaysian market was spearheaded by Bank Negara Malaysia, which issued over USD3.4bln worth of short-term maturity sukuk. Approximately USD931mln was also raised by two Malaysian government-related entities, Dana Infra Nasional Berhad (USD787.6mln) and Cagamas Behard (USD144.5mln). In the Malaysian corporate sukuk sector, five issuers tapped the market in July collectively raising USD1.14bln in proceeds.

Other than Malaysia, the primary sukuk market activity across global markets remained subdued and other obligors’ based in five other jurisdictions tapped the market namely Saudi Arabia, Senegal, Indonesia, Bahrain and Gambia. The sole Saudi-originated sukuk issuance was by the Jeddah-based Islamic Development Bank which issued the USD1bln tranche, accounting for 12.6% of the total monthly issuances volume. Similarly, Senegal’s debut sovereign sukuk worth XOF100bln (USD200.5mln) enabled it to account for 2.5% of the monthly new issuances volume.

In Indonesia, sukuks worth USD188.12mln were issued in July, accounting for 2.37% share of the market. Notably, the Indonesian primary market witnessed the issuance of the jurisdiction’s first corporate sukuk of 2014, worth USD25.11mln by Bank International Indonesia. In 7M14, the Indonesian primary market has been entirely dominated by sovereign issuances by the country’s Ministry of Finance. The other two remaining jurisdictions were Bahrain (USD149.26mln or 1.9% market share) and Gambia (USD1.09mln or 0.01%), on account of regular local currency liquidity management Sukuk al-Salam, issued by the country’s respective central banks.

All issuers in July issued sukuks denominated in the respective local currencies of their domiciles. The only two exceptions were the multilaterals, the Saudi-based IDB and the Malaysia-based IILM, which issued in US Dollars. Based on this, the Malaysian Ringgit accounted for bulk of the issuances, representing 69.8% of the total market (Jun-14: 54.9%). The US Dollar was the second major currency accounting for 23.4% of the total market share, spearheaded by the IDB and IILM sukuk tranches worth a combined USD1.86bln. The West Africa CFA Franc (XOF) was a new entry in the global sukuk market following Senegal’s debut and accounted for 2.5% of the market. The market shares of the remaining currencies were as follows: Indonesian Rupiah 2.37%; Bahraini Dinar 1.9% and Gambian Dalasi 0.01%.

By structure of issuances, the market share of Murabahah sukuk increased a notch to 63.3% in July (Jun-14: 50.6%) while that of Ijarah declined to 6.5% (Jun-14: 13.8%). Moreover, none of the sukuks issued in July were structured as hybrids/combination (Jun-14: 18%). The change is mainly on account of an absence of GCC-based sukuk issuers in July as the Ijarah and hybrid sukuk structures are popular in the GCC. In contrast, Murabahah is the most popular sukuk structure among Malaysian issuers that accounted for bulk of the sukuk issuances in July. The share of Wakalah/Wakalah bil Istithmar sukuks surged to 23.4% in July (Jun-14: 10.1%) spearheaded by the large tranches issued by the IDB and IILM respectively.

By sector, government issuances accounted for 50.3% or almost USD4bln of total issuances in July (Jun-14: 47.0% or USD5.44bln), followed by the financial services sector with a 25.7% or USD2.04bln share (Jun-14: 31.2% or USD3.62bln). Power and utilities was the other major sector in July accounting for 13.7% or USD1.09bln of the issuances volume while the Real Estate and Construction sector accounted for the remaining 10.3% or USD820mln of the volume issued in July.

Overall, a total of 78 sukuk tranches were issued in July, an increased number compared to the previous months (Jun-14: 65; May-14: 62; Apr-14: 68). This increase is mainly due to the greater amount of issuances by Malaysian issuers that generally issue several smaller-sized tranches under one sukuk programme. For example, 33 corporate sukuk tranches were issued by five Malaysian corporate entities in July worth a combined USD1.14bln. Comparatively the GCC issuers have traditionally issued single but larger value tranches.

Among the sukuks issued in July, 34 tranches were issued by the corporate sector totalling USD1.16bln which compares with the 32 sukuks issued in June, worth a much higher USD5.24bln. The value of corporate sukuk in June had been substantially uplifted by huge tranches issued in Saudi Arabia, the UAE and Turkey where corporate issuers had timed the market ahead of the Islamic month of Ramadan. Meanwhile, sovereign issuers issued 32 sukuks (including short-term central bank sukuks) worth USD5.86bln in July, a slight increase compared to the 29 sukuk worth USD5.44bln issued in June. Similarly, 12 government-related entity sukuks were issued in Malaysia worth USD931.1mln which is higher compared to the 4 sukuks worth USD902mln issued last month.

In summary, primary market issuances fell by 31.4% in July to USD7.95bln, which is the lowest monthly volume in 7M14. The decline was on account of the advent of the Islamic month of Ramadan during which corporate issuers have traditionally refrained from tapping the market. Nonetheless, steady issuances by sovereign and quasi-sovereign issuers enabled the primary market volume to reach USD74.15bln in 7M14 which is 6.8% higher than the USD69.42bln volume in 7M13. A notable highlight in this period has been the debut of Senegal in the global primary sukuk market. The Government of Senegal issued its inaugural sovereign sukuk on 18th July enabling it to emerge victorious in the African sovereign sukuk race this year, beating the likes of South Africa, Tunisia, Egypt, Morocco and Mauritania who had announced their own sovereign sukuk plans.

Moving forward, a strong pipeline remains in place for the rest of 2014. Particularly in the sovereign sukuk sector, debut pipeline issuances in 3Q14 include the likes of Luxembourg, Hong Kong, the Emirate of Sharjah and also potentially the Sultanate of Oman. The horizons of the sukuk market continue expanding as more and more jurisdictions tap the market with an increased number of business sectors issuing sukuk. To date, at least 29 jurisdictions have tapped the sukuk market (excluding offshore domiciles) and more are expected to follow suit, particularly in Africa following Senegal’s successful debut sovereign sukuk programme. Overall, based on 2014’s performance so far, the outlook for the global sukuk market remains promising and it is expected that 2014 may turn out to be another record breaking year that may overtake 2012’s annual issuances volume of USD131.2bln.

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