Sukuk making a global impact

This is a landmark year for the sukuk market in the Middle East, Arul Kandasamy, director and head of Islamic banking at Barclays Capital told me recently.

Early this year Dubai firm DP World (formerly PCFC) floated the world's biggest Islamic bond, which raised $3.5 billion and last month another Dubai World company, Nakheel, bettered that with a $3.52 offering. Barclays Capital and Dubai Islamic Bank managed both those issues.

"We feel that the market for Islamic transactions particularly on the capital market side is set to boom. Issuers are becoming more sophisticated and different structures as well as products have been developed," Kandasamy said.

Alternatives

The bank market, the traditional source of industry funding, is slowly getting full up either from sector limits, or country limits or single-obligor limits. That is forcing companies to look at alternatives to fund their medium to long term needs.

"Internally, roughly, we are looking maybe at a 30 to 40 per cent growth in overall issuance from the sukuk market [in the Middle East and GCC] in 2007," Kandasamy said. Middle East companies are expected to raise some $12-$14 billion through sukuk issues this year so that number could get to about $17-$18 billion next year.

"You will also see a lot more securitisation next year, both from banks, who are looking to free regulatory capital by offloading assets, and from corporates, who want to monetise assets and create value from their balance sheets. So there will be two clear trends. Year on year issuance of sukuks will go up and new types of instruments will come into the market."

The nice thing is that deal sizes are getting larger as well.

Historically, sukuk issues ranged from $50 to $300 million but you have had two $3.5 billion deals this year. Prior to this, the largest ever international sukuk was the $1 billion offering of Dubai's Department of Civil Aviation.

With issues of this size hitting the market, they are increasingly being exchanged in the secondary market as well. Trading in the DP World sukuk averages $7-$10 million a day.

"I think it is fair to say that you will see a few more billion-dollar transactions next year, simply because people now have confidence because of the deals that have been done this year. We can tell people it is possible to float a $3.5 billion sukuk and sell them. So the sukuk market is here to stay."

More than 50 per cent of the demand for the DP World sukuk came from outside the Middle East as foreign institutions increasingly become familiar with its structure.

There is, of course, a thriving market for debt in Malaysia already.

Taken together, global capital market in Islamic debt is estimated at $35 billion to $40 billion a year, although much of it is local Malaysian ringgit paper.