Interpreting Middle East Economic News and Analyzing Market Trends

UK triple-A downgrade brings sukuk issuance back in focus

Last month’s downgrade of the UK’s prized tripple-A rating by Moody’s may have had other ramifications.  According to Norton Rose, the downgrade may have brought back the plan to issue sukuk.

 

Five years ago, the UK’s Treasury made headlines as it announced plans to be the first western government to issue sukuk.  The plan had two objectives; first, to diversify the government’s funding base by attracting a new breed of investors, and second, to solidify the UK’s role as the center for Islamic finance.

 

The Treasury cancelled the planned sukuk in 2011 and there has been no mention of it until now.  Here’s the story from Bloomberg:

  

Treasury Minister Greg Clark and Sayeeda Warsi, a minister in the foreign office, are leading a working group to raise the profile of the Islamic finance industry, the Treasury said in an e-mailed statement today. Among items discussed at today’s inaugural meeting was the sale of Islamic bonds, said Shabir Randeree, chairman of DCD London & Mutual Plc in London and a member of the taskforce.

“What we will be looking at is whether a sovereign sukuk or an infrastructure type of instrument will be more appropriate,” Randeree said in a telephone interview from London.

The U.K. announced plans five years ago to become the first Western government to issue bonds compliant with Islamic law only to disband the initiative in 2011 when the Debt Management Office said the securities don’t “provide value for money.” The government is renewing its push as the global market for Islamic-compliant financing is set to double to $3 trillion by 2015, according to Standard & Poor’s.

Read the full story from Bloomberg.

 

The two original objectives for issuing sukuk are still highly relevant today.  As for the sukuk market, it has been breaking new records every year.  Though still a small industry compared to the bond market (sukuk make up a fraction of 1% of the total global bond issuance), sukuk still suffer from a problem envied by bond issuers; demand for sukuk vastly outstrip supply.  New sukuk issues tend to be oversubscribed multiple times over.  This will only increase as more issuers come to the market.  The more sukuk there are on the market, the more demand increases. 

 

Franklin Templeton is getting into the investment side of the sukuk market by launching a sukuk fund.  A major gap in the Islamic investment market has been in fixed income.  Sukuk are only beginning to make it into funds due to their low trading volumes, which is another problem.  Trading of sukuk is light due to the limited supply.  Investors tend to buy and hold to maturity since it finding suitable fixed income alternatives would be difficult.  This is what will keep demand robust for many years to come.