Reuters – A gap between global supply and demand for Islamic bonds is likely to peak in 2014 and then shrink gradually for several years as issuance grows, a study by Thomson Reuters predicted.
Potential demand for sukuk among cash-rich Islamic investors in the Gulf and Southeast Asia has exceeded supply for at least several years, analysts estimate.
Companies and banks have taken time to acquire the expertise to issue sukuk, while many companies have been repairing their balance sheets since the global financial crisis and have not been in a hurry to issue.
The imbalance has helped to produce very low yields for sukuk at issue – in some cases, sukuk have priced inside conventional bonds.
The picture may start to change after next year as issuance picks up, the report said. It forecast the supply-demand gap would rise to $229bn in 2014, from $211bn this year, but then edge down to $187bn by 2018. The report assumes among other things that Islamic institutions aim to allocate around 30% of their funds to sukuk.
New global issuance of sukuk in 2013 is expected to fall shy of last year’s record level, coming in at about $100bn against $134bn in 2012, the report predicted.
During the first nine months of 2013, sukuk issuance in all currencies fell by more than a quarter to $79bn from $109bn a year ago, because of a rise in global credit spreads since May due to the prospect of US monetary tightening.
However, the report forecast that sukuk issuance would resume rising rapidly next year, hitting $130bn in 2014 and $237bn in 2018.
The report found Malaysian issuers continue to dominate the sector because of their heavy use of local-currency sukuk; they issued $54.3bn worth of Islamic bonds in the first nine months of 2013, followed by Saudi Arabia with $8.7bn, the United Arab Emirates with $5.2bn and Indonesia with $5.0bn.
Traditionally, many investors hold sukuk until maturity, but this is changing slowly, according to the report’s survey of 155 investors and sukuk arrangers during August and September.
Only 14.5% of investors now expect to hold to maturity, down from a quarter in last year’s survey. Sukuk are increasingly being seen as mainstream investment options, which encourages trade in them.
A total of 47.3% of investors said they would hold sukuk for between one and three years, up from 42.4% last year. Only 12.7% expected to hold sukuk for less than a year, down from 19.2%.
Investors’ preference for dollar-denominated international issuance decreased in favour of better-yielding local currency sukuk; half of investors said they preferred international sukuk in the latest survey against almost three quarters last year.
Most sukuk are still traded over the counter – only 32 out of 520 sukuk issued in the first nine months of 2013 were listed on exchanges, a proportion that was almost unchanged from 2012.
Partly because of the relative complexity of sukuk structures, which avoid interest payments, issuing sukuk is often more expensive than issuing conventional bonds. Most sukuk arrangers, 72%, said they regarded sukuk as a generally more expensive option; almost half expected the additional costs to exceed $200,000.
But most issuers, 61%, said they would still issue sukuk if the yield they had to pay was 50 basis points higher than what they would pay on a conventional bond. A full 26% said they would issue sukuk regardless of the yield difference