Nade Ali Shah
Head of DCM Sovereigns and Supranationals
Despite the challenges faced by the sukuk market, there have been a number of significant developments in recent months, including regulatory changes in the US and the inclusion of sukuk in a number of key indices. These could help change market dynamics, address some of the shortcomings and increase both issuance and demand.
The demand-supply gap is itself caused, at least in part, by the complexity of issuing a sukuk, particularly for those unfamiliar with this segment of the financial market. Whilst issuing a conventional bond might take just a few weeks, an initial sukuk issuance can take many months as identifying appropriate sukuk assets and finalizing the sukuk structure often takes longer than expected. That may explain why, after a wave of sukuk from new issuers such as the UK and Luxembourg in 2014, the number of new entrants to the market has dwindled. There are still some non-traditional markets where activity looks promising though, such as formosa sukuk in Taiwan – a number of large financial institutions from the Middle East and beyond have issued such instruments and other corporate issuers have looked closely at following them.
Increasingly, we see that sukuks have become a part of mainstream investments for fund managers, central banks, sovereign wealth funds and banks. The demand momentum is also being helped by ongoing developments in the regulatory environment. One significant change came with the Saudi sovereign sukuk – among the disclosures in the prospectus was one which stated that sukuks might be considered an asset-backed security under the Dodd-Frank regulations. The full impact of that has yet to be seen, but it may be followed by a similar approach from regulators in other markets, in which case it could reduce issuance.
Another area of potentially great significance is the inclusion of sukuks in the EMBI and JACI indices published by JP Morgan. This is seen as a very positive development, as it brings sukuks onto the radar of many more investors and fund managers. It has already helped to bring the spreads on sukuks from the likes of Indonesia, Turkey and South Africa into line with their commercial bonds. With pricing relatively flat between conventional and Sharia-compliant bonds, issuers will need additional reasons if they were to tackle the complexity involved in a sukuk.
“Maybe there is some pricing benefit but it’s probably not enough in itself to be a reason to do a transaction. There needs to be something else out there,” said Michael Bennett, Head of Derivatives and Structured Finance at the World Bank, during the recently concluded Global Borrowers & Bond Investors Forum in London. We saw this played out with sukuk issued by the International Finance Facility for Immunisation (IFFIm). The World Bank worked with the organization to issue two sukuks in 2014 and 2015, raising $500 million and $200 million respectively. For the IFFIm, it was a way to diversify its investor base and raise its profile in the Middle East.
|Nade Ali Shah|
Nade Ali Shah, Head of DCM Sovereigns and Supranationals at Standard Chartered, joined Michael Bennett, Head of Derivatives and Structured Finance at the World Bank, to lead a roundtable discussion about the challenges for sukuk issuers and investors at Euromoney’s recent Global Borrowers and Bond Investors Forum in London.
About the Author
Nade Ali Shah is an executive director in the DCM, sovereigns and supranationals team based out of Dubai. Nade has worked on numerous landmark and high-profile benchmark transactions within the sovereign, supranational and agency asset class across Africa, Europe, Asia and US. He has also been involved in numerous structured and derivative transactions in relation to public sector financing and liability management. In addition, he has worked with a number of high profile sovereign issuers, advising them on issuance of capital market transactions, positioning their credit story with global investors, marketing their bonds to global investors and executing benchmark transactions. In his current role, Nade is responsible to originate and execute bond and Sukuk transactions in SCB’s key footprint markets of Asia, Africa and the Middle East. Within the Sukuk space, Nade has been involved in landmark Sukuk issuances, including deals for Qatar, IsDB, IFFIm, Dubai, Oman, Sharjah, Pakistan and Bahrain. Nade holds a BSc degree in economics and mathematics from Saint Lawrence University, NY.
Euromoney and Standard Chartered will be running a series of webinars on debt capital markets. The next will be ‘India states’ finances and borrowings: The other half of the story’ on July 19. Find out more.
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