Islamic finance deals have the best start ever with oil up 40%

Singapore

GLOBAL offerings of sukuk are off to their busiest start on record this year, with bankers at HSBC and Deutsche Bank citing the high price of oil as a driver of the vibrant issuance.

Sales of new sukuk maturing in at least a year have touched nearly US$24 billion so far in 2022, the best start to any year, according to Bloomberg-compiled data going back to 1999. Saudi Arabia and Turkey were the two biggest issuers.

Although it slid on Thursday (Mar 31), crude is up roughly 40 per cent this year, leaving investors in oil-producing countries, some of the biggest markets for Islamic finance, flush with cash. With fixed-income markets in upheaval as the US raises interest rates, syariah-compliant debt has fared better than global bonds with investment-grade ratings, losing only 4 per cent versus their 7 per cent dive so far this year, according to Bloomberg indexes.

"There has been pent-up liquidity and demand for Islamic sukuk for quite a while and that, coupled with challenging market conditions overall affecting primary and secondary markets, is driving increasing interest in sukuk issuance relative to conventional bond issuance," said Khaled Darwish, Middle East and North Africa's head of debt capital markets at HSBC.

The bank is the top arranger of sukuk deals this year, Bloomberg-compiled data shows.

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In a world of rising interest rates, investors often favour debt with shorter maturities, which adds to the attractiveness of sukuk.

The average duration of a note in Bloomberg's index of global dollar sukuk is just about 4 years. That compares with more than 7 years for a Bloomberg gauge of global high-grade notes in various currencies.

"Many issuers are dynamic, with diversified funding avenues, and select to tap the market which offers strong liquidity," said Agata Raszkiewicz, head of South-east Asia debt capital markets at Deutsche Bank. The popularity of sukuk "can be partly attributed to higher oil prices boosting sentiment of some Middle Eastern investors".

Accelerating inflation is bad news for fixed-income investors, and Russia's Ukraine invasion has hurt appetite for emerging-market assets, Fitch Ratings wrote earlier this month. The commodities boom may actually hamper issuance as it reduces the need for external financing.

Moody's Investors Service sees lower sales in 2022 compared with last year. CIMB Investment Bank, a key arranger in Malaysia, the world's largest sukuk market, isn't quite so pessimistic. "Global sukuk issuance volume is expected to be flat for the remainder of 2022," CIMB's chief executive officer Jefferi Hashim said. BLOOMBERG