Worldwide sukuk sales surged in April, setting the stage for a record year as Middle East issuers fund infrastructure projects and Malaysian companies take advantage of falling borrowing costs to refinance debt.
Offers reached $6.1 billion this month, the most since September and almost double March’s $3.5 billion, data compiled by Bloomberg show. CIMB Group Holdings, the world’s largest Islamic bond arranger, see sales equaling or exceeding the high of $46.5 billion in 2012, and HSBC Holdings, the second- biggest, forecasts record issuance in 2014.
The average yield on global Islamic notes fell eight basis points to a 10-month low of 2.87 percent in April, after climbing to 3.59 percent in September as the prospect of US stimulus cuts pushed up developing-nation borrowing costs, a Deutsche Bank index shows. Hong Kong’s plan to sell as much as $1 billion of dollar sukuk after this year’s summer holidays may spur Shariah offers from Chinese companies in the city.
“Sukuk sales enjoyed a strong showing in April as market volatility receded following interest-rate stability from the diminishing impact of Fed tapering on bond yields,” Angus Salim Amran, the Kuala Lumpur-based head of financial markets at RHB Investment Bank, said in an interview on Tuesday. The lender has received “strong interest” from potential issuers in North Asia planning to tap the market “very soon,” he said.
Offers from Malaysia and the Gulf Cooperation Council countries will swell to $66 billion this year, Amran estimated. The GCC comprises Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Bahrain and Oman.
Sales of Shariah-compliant debt that pay returns on assets to comply with Islam’s ban on interest have reached $17.2 billion so far this year, 12 percent more than at the same point in 2013 when full-year issuance was $43.1 billion.
Saudi Electricity’s $2.5 billion dollar sukuk offer was April’s biggest followed by a 2 billion ringgit ($614 million) sale by DanaInfra Nasional, a Malaysian state-owned company set up to finance a subway in Kuala Lumpur.
The government of Saudi Arabia announced 855 billion riyals ($228 billion) of targeted spending in its 2014 budget released in December as it builds roads, industrial centers and airports.
Sales from the Middle East will pick up in the second half of the year, led by infrastructure developers, while government-guaranteed offers and companies seeking to refinance debt will account for the majority of Malaysian issuance, Badlisyah Abdul Ghani, chief executive officer at CIMB Islamic Bank in Kuala Lumpur, said in a phone interview on Tuesday.
“That naturally will give Malaysia a run for its money,” he said. “Issuance in Malaysia will be a mixture of government- guaranteed and corporate,” he said, adding that local banks would look to raise funds to comply with more stringent rules set out by the Basel committee.
The Islamic unit of Malayan Banking sold 1.5 billion ringgit of sukuk in March to comply with Basel III requirements. Cagamas, a Kuala Lumpur-based state-owned mortgage provider and 1Malaysia Development, a sovereign wealth fund, have a combined 10.1 billion ringgit of non-Islamic and Shariah- compliant debt due this year, according to data compiled by Bloomberg. Petroliam Nasional, the country’s state-owned oil company, has $2.9 billion.
As well as Hong Kong, Britain is also planning a debut sovereign sukuk sale of 200 million pounds ($336 million), although it may not happen until early 2015. Japan Bank for International Cooperation said this month it’s considering its first offer of ringgit Islamic notes in Malaysia in 2014.
Before the surge of issuance this month, sales in the first quarter amounted to $11.1 billion, the quietest start to a year since 2011, data compiled by Bloomberg show.
“We’re unsure whether it will be a record year as 2014 has seen the slowest start in a few years,” Jesse Liew, who manages about 554 million euros ($768 million) as the head of global Islamic bonds at BNP Paribas Investment Partners Malaysia in Kuala Lumpur, said in an interview on Tuesday. “But with more developed markets becoming involved with issuing sukuk, that could send a good vibe to investors and issuers.”
The yield on Malaysia’s benchmark five-year Islamic bonds has fallen 14 basis points to 3.84 percent from 3.98 percent on Jan. 28, the highest level since July 2009. The yield rose 63 basis points, or 0.63 percentage point, in 2013 as investors pulled money from emerging markets.
“Issuers have been waiting for some time for the markets to stabilize, after the adverse impact of the tapering exercise last year,” Rafe Haneef, chief executive officer at HSBC Amanah Malaysia, the Islamic unit of Europe’s largest bank, said in an interview on Tuesday. “We are likely to see the momentum for sukuk pick up, particularly in the second half.”