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Wednesday January 25, 2012

Pent-up demand for sukuk

Investors to diversify their investments from bond holdings

KUALA LUMPUR: There is a pent-up demand for sukuk issuances from Islamic institutional investors and banks as they seek to diversify their investments from bond holdings and this opens up an opportunity for the sukuk market to be a useful source of additional funding, Fitch Ratings said.

The demand is likely to also come from sukuk supply from sovereigns outside Islamic nations in the Middle East and South-East Asia, the agency said, adding that South Africa and Ireland were seriously considering a sukuk issuance.

“Issuers from outside the Islamic world could contribute more eventually to the increase in supply as they diversify their investor base. Malaysian issuers accounted for more than half of 2011 supply by volume.

“Issuers in Malaysia, Qatar, the United Arab Emirates, Indonesia and Saudi Arabia provided for more than 90% (of supply),” Fitch Ratings said in a statement.

Malaysia's portion consisted of more than half of the RM261.85bil of total sukuk issuances, the Zawya Sukuk Monitor, an online monitoring service consisting of a database of sukuk issued and in the pipeline globally, said.

Among the major issuance that was conducted in 2011 was Khazanah Nasional Bhd's maiden world's first three-year yuan-denominated offshore sukuk of RM245.34mil (500 million yuan) in October 2011.

According to Khazanah, the transaction drew a demand of 3.6 times book size, which had enabled it to upsize the deal from an earlier announced RM147.21mil (300 million yuan) to RM245.34mil.

Khazanah had said that this issuance attracted a diverse group of investors, including financial institutions, asset management companies, private banks and statutory bodies from Malaysia, Singapore, Hong Kong, the Middle East and Europe.

Meanwhile, sukuk suppliers outside the Islamic world is likely to pick up pace and recent developments in countries such as South Africa and Ireland continues to lend credence to that trend.

Fitch Ratings said South Africa had, in December 2011, invited banks to pitch for a government sukuk advisory and structuring mandate.

Meanwhile, Bloomberg had reported in mid-January that Ireland, which is due to return to the bond market in 2013 under the terms of its European Union/International Monetary Fund assistance package, is also considering a sukuk issuance.

Within the Islamic nations itself, Malaysia could see more competition for sukuk issuance from Saudi Arabia when the General Authority for Civil Aviation of the Kingdom is expected to bring a government-guaranteed deal that could pave the way for more issuances from Saudi Arabia.

However, Fitch Ratings said that despite the strong year-on-year increase in supply, the sukuk market remained a fraction of the size of the global bond market.

This was due to the lack of standardised deal structure that had not kept pace with demand from Islamic institutional investors and banks, it said.

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