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Trend Analysis - 19 November 2020

International Sukuk programs to bolster finances

International press reports have suggested that a growing list of corporates and sovereigns, particularly in the GCC region, are turning to international debt markets to bolster finance amid COVID-19. Hawksford's Gavin Wilkins explores the impact of coronavirus on global Sukuk markets, the potential for UK markets to play a role in meeting emerging funding requirements and the optimum structuring considerations.

Author of article:

Gavin Wilkins

Global Head of Client and Intermediary Relationships

Coronavirus impact and the key role of Sukuk in the funding mix

2020 has certainly heralded unprecedented challenges, affecting us all in different ways. From a purely financial perspective, the upheaval and uncertainty caused by reduced customer demand, supply chain disruption and reduced employee productivity have been stark. As has the resultant impact in widening fiscal deficits and significantly increased funding requirements.

Over the last decade, global Sukuk markets have become an increasingly prominent source of funding for corporates, financial institutions and governments. So, it should come as no surprise that they are expected to play a key role in meeting the emerging funding requirements. According to the Fitch Ratings agency, Sukuk are now expected to represent a considerable proportion of the funding mix – up to 25% across the GCC, Malaysia, Indonesia, Turkey and Pakistan.

Growing list of sovereigns and corporates turning to international debt markets

Despite the unprecedented headwinds, market conditions do appear to have improved. Fitch Ratings now predict volumes for the full year 2020 to match those of 2019. Given the dearth of activity earlier in the year, this suggests plenty to come as 2020 draws to a close.

It is anticipated that sovereign demand will continue to lead the charge. Last month, Dubai successfully completed a US$2 billion issuance of Sukuk bonds — reportedly 5x oversubscribed and at the lowest profit rate in government history. That could indicate high investor confidence from a sovereign credit perspective and the overall resilience of the economy in the face of the pandemic.

In recent weeks, international press reports cite a growing list of sovereigns and corporates looking to follow suit and take full advantage of the lower funding costs available - particularly in the GCC. Dubai’s listed National Central Cooling Company (Tabreed), Abu Dhabi’s Etihad Airways, Oman’s state oil company OQ and Saudi based Arab National Bank to name but a few.

The potential for UK markets to support funding requirements

Significant capital will be required from both private and public markets across the globe.

London is undeniably blessed with access to deep capital pools and it is well known that Islamic finance is one of the fastest-growing sectors of the UK financial marketplace. London’s continued aspirations to become a global Islamic finance centre mean that it has both the appetite and the means to play a key role in supporting funding requirements.

The London Stock Exchange (LSE) remains a key venue for Sukuk listings. In February, Riyad Bank of Saudi Arabia issued US$1.5 billion Sukuk on the International Securities Market of the LSE. According to Reuters, the issue was 5X oversubscribed with an order book of over US$7.5 billion.

Over US$50 billion has been raised through Sukuk on the LSE and the wider ecosystem in the UK has evolved to include Shariah index solutions which are Fatwa-certified, school neutral and AAOIFI accredited.

Structuring Sukuk for issuance on UK public markets

Typically, Sukuk will be structured as an orphan arrangement in a suitable International Finance Centre (IFC), requiring a third-party professional Trustee to maintain the appropriate level of independence between originator and issuer.

Which IFC is most suitable will depend on factors specific to the issuance.  Jersey and Cayman Islands have proven popular primarily due to their stability, tax neutrality, investor friendly laws and strong integration with global financial markets.

Jersey has a particularly strong nexus and track record in relation to London markets — a position which is only expected to strengthen further in a post-Brexit UK. There are more Jersey companies within the FTSE 100 and AIM than any other international jurisdiction outside the UK.

Sukuk offerings utilising Jersey include those listed on London Stock Exchange, Bursa Malaysia, Nasdaq Dubai and Kuwait Stock Exchange. It is also noteworthy that important players such as the Islamic Development Bank have utilized Jersey.

And what of the future?

As funding requirements remain high and costs remain low it is likely that Sukuk will continue to be an obvious choice. London’s deep pools of capital and its aspirations to become a global Islamic finance centre mean that it is likely to play an increasingly important role. And Jersey as a leading IFC and conduit for UK capital also has a key structuring role to play. 

Contact Gavin Wilkins

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