Category Archives: Sukuk

Islamic Bonds

Abu Dhabi Islamic Bank issues world-first Basel III compliant Sukuk

Abu Dhabi Islamic Bank issues world-first Basel III compliant Sukuk

Source: http://www.ifre.com/adib-pushes-sukuk-boundaries-via-perp/21051902.article

Investor appetite for bank capital issuance from emerging market lenders shows no signs of abating, with Abu Dhabi Islamic Bank printing a blowout deal last week that was the first Basel III-compliant sukuk issue.

The innovative Hybrid Tier 1 non-call six perpetual note offering raised US$1bn at 6.375% on the back of an incredible US$15bn book from 330 orders as private bank accounts, predominantly in Asia as well as in other regions, European fund managers, and even the odd sukuk investor scrambled to get their hands on the paper.

“There was a huge response to the roadshow, which underpins the groundbreaking nature of the transaction,” said James Nelson, director, bond syndicate at Standard Chartered, which co-led the deal with HSBC, Morgan Stanley and NBAD.

Rival bankers were critical of the execution process that saw pricing ratchet down by 62.5bp from initial guidance of the 7% area. “Investors are not happy when the pricing is dragged so tight and the books get so big in the process,” said one official.

While acknowledging that the tightening was aggressive, bankers close to the deal argued that it was in line with the performance of other recent bank capital transactions.

Gazprombank’s US$1bn perpetual non-call 5.5-year note issue started in the mid to high 8% range and was priced at 7.875%, for example, while a US$575m perpetual non-call six issue for Friends Life began in the mid-8% range before also pricing at 7.875%.

“It was key to engage every investor in this price discovery process and test yield sensitivities, given the innovative nature of this trade,” said Souhail Mahjour, an official on the EMEA debt syndicate desk at HSBC.

Part of the challenge for the leads was the wide range of investor views during the roadshow, with one account arguing that the notes should come at low to mid-5% at one extreme, while others sought 8% at the wide end. “You could drive a bus through investors’ views,” said one banker.

One way to calculate fair value is to take ADIB’s outstanding senior 2016 notes, which were trading at a bid yield of 2.80% earlier last week, and work backwards.

Assuming that a new 10-year non-call five Tier 2 issue from the lender would come 80bp back of that for the subordination and then a another 30bp or so for the curve extension, fair value for that bond offering would be in the high 3% area. Adding a further 150bp–220bp for the difference between Tier 2 and old-style Tier 1 for some emerging market banks takes fair value from high 5% to low 6%.

Private anchors

As expected, private banks anchored the trade, taking 60% of the allocation, followed by fund managers at 26% and banks at 11%. By geography, Asia was the biggest recipient with 38%, followed by the Middle East at 32%, Europe at 26% and US offshore at 4%.

The sukuk investor base was a marginal participant in the trade.

“The local investor base – dominated by banks – wasn’t expected to play as big a role as they usually do for a sukuk issue as they have limited scope to buy other banks’ capital instruments,” said Mahjour. “Only the most overcapitalised banks had the power to buy pieces of this trade.”

Key features of the structure include an issuer call option in year six and on every periodic payment date thereafter, coupon resets (without step-ups) every six years and non-cumulative coupon suspension (optional and mandatory), subject to a dividend stopper.

One banker added that the Tier 1 structure was perfectly attuned with Sharia principles, given that the flexibility to cancel coupons and the perpetual maturity provided equity-like features to the instrument. The deal is unrated. ADIB’s senior ratings are A2/A+; Moody’s/Fitch.

Surge in sukuk demand outpaces the issuance

Surge in sukuk demand outpaces the issuance

Source: http://www.ft.com/intl/cms/s/0/7c6fef80-2293-11e2-8edf-00144feabdc0.html

The numbers look good for the Islamic bond market.

Issuance hit a record high in 2011 and figures for the first half of 2012 show that volumes are already up another third. It is widely expected that issuance of sharia-compliant bonds, or sukuk, will top the $100bn mark before the year is out.

Despite this rise, however, questions remain as to whether the increase in issuance is enough to match investor demand. According to consultancy Ernst & Young, the answer is no.

It says the global supply of sukuk is less than half that of investor demand and the gap may widen further unless more institutions emerge capable of launching new issues.

The consultancy says current outstanding demand for Islamic bonds totals some $300bn, and is expected to grow to $900bn by 2017. “One of the foremost challenges faced by the sukuk market is the supply side constraint, as demand continues to outpace new issuance,” says Ashar Nazim, Islamic finance services leader at Ernst & Young.

He says the exponential rise is primarily a result of double digit growth of the Islamic banking industry, and the increasing appetite for credible, sharia-compliant, liquid securities.

“The demand comes from Islamic financial institutions as well as fund managers and high net worth individuals. Conventional institutions are also showing renewed interest in investing in sukuk as a result of the eurozone debt crisis as these Islamic products are backed by real assets,” says Mr Nazim.

Rafael Dalmau, head of sharia-compliant portfolio management at BNP Paribas Investment Partners, agrees: “The organic growth rate of the market is on a clear upward trend, with no signs of slowing down in the near or medium term.”

He says: “In addition to the natural demand for sukuk, non-Islamic investors have also taken notice of the sound returns that this sector has delivered over the last three to five years. Liquidity used to be a deterrent for non- Islamic investors but, nowadays, liquidity is in line with conventional bonds of similar credit profiles.”

Just last month Qatar Islamic Bank, the Gulf Arab state’s largest sharia-compliant lender, returned to the debt markets with a $750m Islamic bond sale.

Order books for the issue were reportedly in excess of $6bn ahead of launch and much of this is said to have come from cash-rich Islamic investors held back by limited sukuk supply in the market. The hope is more issuers will follow suit.

“Issuance can certainly meet demand if more conventional issuers choose to structure their bonds in a sharia-complaint manner as GE and Nomura have chosen to do in the past,” says Nigel Denison, head of wealth management at Bank of London and The Middle East. “We expect to see more issuers entering the market.”

For those many entities whose remits are suitable for Islamic securitisation, adds Mr Dalmau: “There is a widespread view that costs may be higher and/or structures deemed to be too complex” when launching sharia-compliant paper.

“In order to overcome these perceptions, the investment banking industry, both Islamic and non-Islamic, needs to be more proactive in inviting global multinational companies to diversify their funding sources,” he says, adding that the global sukuk market is already being used by a large global AA-rated multinational company and a couple of large global banks.

“We will see this trend [of new issuers coming to the market] continuing, albeit at a very slow pace. But signs are encouraging and a good example is the Republic of Ireland’s recent efforts in bringing new sukuk issues – both sovereign and quasi-sovereign – to market.”

According to figures for the first six months of 2012, Malaysia issued more than 70 per cent of global sukuk, while Saudi Arabia grabbed second spot with a 13 per cent share of global issuance. The first sukuk were issued by Malaysia in 2000.

Mohammed Dawood managing director, global capital finance, HSBC Amanah, says: “Yes, the sukuk market has really taken off in the past 12 to 18 months, particularly in the [Gulf Co-operation Council] and Malaysia. We’re seeing it becoming a preferred mode of financing.

“But there are still challenges in structuring a sukuk – those being the availability of sharia-compliant assets as well as the legal and taxation frameworks in different jurisdictions. In some cases, the legal and tax frameworks still render sukuk issuance uneconomical.”

Mr Denison adds: “The sector is still considered niche by some issuers, and the apparent additional complexity of meeting sharia standards may be assumed to be costly.

“Until awareness spreads of the standard structures used in sukuk, traditionally conventional investors and issuers may continue to shy away.”

IFSB issues draft capital guidelines for Islamic banks

IFSB issues draft capital guidelines for Islamic banks 

Source: http://www.gulf-daily-news.com/NewsDetails.aspx?storyid=340953

DUBAI: The Islamic Financial Services Board (IFSB) released new draft guidelines on capital adequacy for Islamic banks and the risk management of takaful (Islamic insurance) companies, the industry body said yesterday.

The Kuala Lumpur-based IFSB sets global guidelines for Islamic finance, although national financial regulators have the final say on how they apply these.

The IFSB released its original guidelines on capital adequacy in December 2005, based on Basel II standards which regulators were then applying around the world. Since then, global regulators have agreed on stricter Basel III standards which will be phased in over the next several years.

Sukuk issued against assets owned by an Islamic bank, may be used by that bank as additional capital to meet regulatory minimums, the draft guidelines state.

The minimum maturity of the sukuk should be five years, and it should not have step-up features, such as periodic increases in the rate of return, giving an incentive to the issuer to redeem it. These provisions align the IFSB with Basel III. Any capital raised through sukuk issues cannot be counted as part of the capital buffers mandated by Basel III, since sukuk are not common equity.

Because Islamic finance is more closely linked to real assets than conventional finance, it is less prone to credit bubbles, and Islamic banks do not engage in highly speculative trading, the IFSB said.

But it also noted that Islamic finance was in some ways vulnerable to cyclical swings in economies – for example, many Islamic instruments are based on commodity prices. So it makes sense for Islamic banks to build up countercyclical capital buffers in good times, the IFSB concluded; these buffers are one of the major provisions of Basel III.

The draft guidelines state how capital requirements should apply to banks’ Islamic windows, and assign risk weightings to Islamic transactions such as musharaka and mudaraba.

Pakistan Mutual Funds Push for More Sukuk Issues to Invest Cash

Pakistan Mutual Funds Push for More Sukuk Issues to Invest Cash

Fund managers in Pakistan are urging the government to increase offerings of Islamic debt, saying a 13-fold rise in sukuk sales this year isn’t enough for them to invest inflows of cash.

The central bank plans to auction 45 billion rupees ($525 million) of three-year sukuk in the domestic market on March 1 and another 55 billion rupees in the three months ending June 30. The sales will take the total for the fiscal year to 189 billion rupees, compared with 14.4 billion rupees in the previous 12 months.

Pakistan’s Islamic banking assets climbed an average 30 percent annually in the past four years to 411 billion rupees as of June 2010, 6 percent of the financial industry’s total, according to a central bank estimate in October. Pakistan aims to double that share to 12 percent by 2012 and plans to issue two more Shariah banking licenses that will take the total to seven, the monetary authority said in October.

“The government has relied too much on the conventional debt market without realizing how much liquidity is in the Shariah-compliant industry,” Sajjad Anwar, who helps manage the equivalent of $187 million at NBP Fullerton Asset Management Ltd., a unit of the nation’s biggest lender National Bank of Pakistan, said in a Jan. 11 interview from Karachi. “Islamic funds and banks are just waiting.”

Banking Licenses

Pakistan needs to finance a budget deficit that may reach 6 percent of gross domestic product, or 1 trillion rupees this fiscal year, exceeding the government’s target of 4 percent, according to a report from the State Bank of Pakistan on Oct. 25. The shortfall was 6.3 percent last year, according to data on the Finance Ministry’s website.

The yield on the three-year debt will rise to 13.89 percent from 13.39 percent at the prior offering on Dec. 13 as the central bank may increase interest rates to temper inflation, said Karachi-based Abdullah Ahmed, treasurer at Meezan Bank Ltd., the nation’s biggest Shariah-compliant lender.

“In an environment when everyone is expecting a hike in interest rates, the demand for such paper will remain high,” Ahmed said in an interview on Jan. 12. “Islamic banks are desperate to deploy their funds.”

Inflation stayed above 15 percent for a fourth month in December after unprecedented floods in August destroyed roads and damaged crops worth $3.3 billion.

Inflation to Slow

“The inflation rate will start falling from next fiscal year to average 13 percent as the government aims to reduce borrowing and impose additional tax measures,” Mohammed Sohail, chief executive officer at Topline Securities Ltd., said in an interview yesterday from Karachi.

The State Bank of Pakistan increased its discount rate by half a percentage point to 14 percent on Nov. 29, the third policy tightening since July. The central bank has raised borrowing costs from a record low 7.5 percent in 2005. Policy makers will increase the rate by 50 basis points to 14.5 percent at the Jan. 29 meeting, according to Meezan Bank’s Ahmed, who said he will buy sukuk at the next auction.

Pakistan’s central bank uses the yield on its six-month non-Islamic treasury bills as a benchmark for pricing debt. The yield rose to 13.55 percent at a sale on Jan. 12, nine basis points more than the previous offering. The rate was 12.05 percent a year ago, Bloomberg data shows.

Global sales of sukuk, which pay asset returns to comply with the religion’s ban on interest, fell 15 percent to $17.1 billion in 2010, according to data compiled by Bloomberg. Issuance reached a record $31 billion in 2007.

Islamic Debt Returns

Shariah-compliant bonds returned 12.8 percent last year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in developing markets gained 12.2 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate shrank eight basis points this month to 281, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Average yields dropped 13 basis points to 4.61 percent.

The yield on Malaysia’s 3.928 percent sukuk maturing in June 2015 rose two basis points to 2.8 percent today, according to prices from Royal Bank of Scotland Group. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s narrowed one basis point to 330 today, Bloomberg data show.

Government Debt Sale

The government sold 37.2 billion rupees of Islamic securities on Dec. 13 and got orders for 57.7 billion rupees. At the previous sale on Nov. 8, it raised 51.8 billion rupees after receiving offers of 64.7 billion rupees. Pakistan had local- currency debt of 5.35 trillion rupees outstanding, including 94 billion rupees of sukuk as of November 2010, according to the central bank’s website.

Pakistan is attracting investors even as the country battles an eight-year insurgency with militants in its border region with Afghanistan. The U.S., a major financial donor, is pushing President Asif Ali Zardari to intensify that crackdown. A policeman assassinated secular politician Salman Taseer on Jan. 4 for opposing an Islamic blasphemy law.

Albaraka Banking Group BSC, Bahrain’s biggest publicly traded Islamic lender, boosted its branch network to 90 after acquiring Pakistan’s Emirates Global Islamic Bank Ltd. in 2010. Meezan Bank, controlled by Kuwait’s Noor Financial Investment Co., plans to open 225 new outlets in the next four years.

The central bank predicts the economy will expand 2.5 percent this fiscal year, faster than last year’s 1.2 percent. The Karachi Stock Exchange KSE100 share index reached a 2 1/2- year high today. The gauge rallied 28 percent last year after soaring 60 percent in 2009.

“For Islamic banks, sukuk will remain attractive because the sovereign notes offer the least risk and high returns,” Pervez Said, chief executive officer of Dawood Islamic Bank, 35 percent owned by Bahrain’s Unicorn Investment Bank BSC., said in an interview yesterday from Karachi. “Political and security problems have always been associated with Pakistan. The issue is where do we invest?”

Source: http://www.bloomberg.com/news/2011-01-17/pakistan-funds-push-for-sukuk-to-invest-cash-islamic-finance.html

To contact the reporter on this story: Khalid Qayum in Singapore kqayum@bloomberg.net; Haris Anwar in Islamabad at Hanwar2@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.

Japan eyes sukuk tax breaks to draw Islamic investors

Japan eyes sukuk tax breaks to draw Islamic investors

 

 

 

 

 

 

Japan will alter regulations to give foreign investors tax breaks on sharia bond dividends, the latest country to pursue Islamic finance to woo investors demanding sharia-compliant assets. Islamic bond dividends received by foreign investors may be declared tax-free as early as end-2011. As neighboring countries had already changed or been changing tax systems to exclude Islamic bonds from taxation, “Japan also has understood the necessity of enhancing the attractiveness as an investment destination,” a Japanese FSA official said. Japanese regulations do not forbid the issuance of Islamic bonds but these funding instruments are often not commercially viable without tax breaks on dividends received.

The transfer of assets tends to attract tax, which can make Islamic finance transactions more costly than conventional deals.

Japanese brokerage Nomura Holdings sold $100 million of Islamic leasing bonds in Malaysia in July and Sumitomo Corp is said to be arranging the first Islamic funding deal in Japan.

Islamic finance practitioners expect the regulatory change to encourage more interest and drive sukuk issuance.

“The range of investors’ portfolio variation can be expanded and the underlying demand may be stimulated,” said Etsuaki Yoshida, a deputy chief of Africa office at Japan Bank of International Cooperation.

The $1 trillion Islamic finance sector saw a burst of interest about two years ago after the global financial crisis prompted a search for alternative sources of funding but interest has since cooled slightly as conventional debt markets reopened. Non-Muslim countries such as Singapore, Australia, France and Hong Kong have either amended or are working on changes to their regulatory framework to accommodate Islamic finance, which avoids interest payments in favour of asset sales or rentals to underpin financial transactions.

But efforts to develop Islamic financial markets have met resistance in South Korea and India.

Source: http://www.reuters.com/article/idUSL3E7CD0OZ20110114

Push for asset-backed Sukuk framework lifting demand

Push for asset-backed Sukuk framework lifting demand

 

 

 

 

 

It’s good to see a move towards asset-backed Sukuk rather than asset-based Sukuk, which are obviously more close to the spirit of the Shariah. In asset-backed Sukuk, investors become owners of the underlying assets in case of default, whereas asset-based Sukuk give no such recourse.

DUBAI, Jan 10 – Investor worries over the impact of defaults in Islamic bonds is driving a push for a better structure for asset-backed instruments that should help alleviate concerns, bankers and lawyers said.

Islamic finance industry body IIFM is looking to develop a template in 12 to 18 months that will help reduce some of the legal and operational complexities surrounding asset-backed Islamic bonds, or sukuk, said its chief executive Ijlal Alvi.

The Nakheel property arm of Dubai’s state-owned conglomerate Dubai World [DBWLD.UL] staved off default on a $4.1 billion Islamic bond after a last-minute bailout from Abu Dhabi in 2009, after Dubai World announced plans for repayment on $26 billion in debt, spooking global markets.

Also still ongoing is Kuwait Investment Dar’s <TIDK.KW> discussions with creditors over a $100 million sukuk it defaulted on in 2009.

Asset-backed sukuk are seen closer to the spirit of Islamic law as they involve a transfer of tangible assets — investors become the legal owners of these in the case of default.

Investors were taken aback as they realised the majority of sukuk were asset-based and that these could not be accessed directly by sukuk holders following a default.

“People didn’t really talk about asset-backed sukuk until the stress tests were applied,” said Tim Ross, partner at Latham & Watkins in Dubai. “Some investors were caught off guard — they had an unsecured payment claim.”

As investors cried foul, market watchers hoped the industry would shift toward a securitised model, but that has yet to happen, as more than 90 percent of transactions are still structured as asset-based sukuk.

“While asset-backed transactions, both conventional and Islamic, have been done in the Gulf, they are more difficult and costly for companies to undertake,” said Gregory Man, senior associate at Clifford Chance in Dubai.

He added that such transactions also face tougher legal and analytical requirements imposed by rating agencies and many companies in the region lack sufficiently robust internal systems to service and report on the assets to investors and agencies.

A master agreement would aim to provide a standardised base from which issuers could structure the sukuk in line with their own jurisdictions and increase awareness about the product.

“In this credit environment, creditors would prefer direct recourse to the assets,” Alvi said. “Although asset-based is a valid structure as well, I think it is preferable to encourage increase in asset-backed sukuk over the medium to long-term.”

Despite the challenges, companies would look to issue more asset-backed sukuk if investors demanded it, bankers said.

“Among investors, there is still no real drive to do it,” said one Gulf-based Islamic banker. “Much of the corporate world comes from a conventional background so asset-based sukuk is closer to the debt model they are used to working with.

“Most investors simply don’t care enough, despite all the frenzy following defaults.”

Source: http://sg.news.yahoo.com/rtrs/20110110/tbs-assetbacked-sukuk-7318940.html

Sukuk issuance to reach pre-crisis level by end 2011: Daud Vicary Abdullah

Sukuk issuance to reach pre-crisis level by end 2011: Daud Vicary Abdullah

Global issuance of Islamic bonds will take another year to reach pre-crisis levels as new markets in Europe and Asia have yet to make up for the slump in the Gulf, said Deloitte’s head of Islamic Finance on Tuesday.

Underwritten issuance of Islamic bonds, or sukuk, reached $14.3 billion last year, according to Thomson Reuters estimates, well below the $20-30 billion in annual issuance before the global financial crisis.

Malaysia, the industry’s biggest market, held up well in 2010 but issuance in the Gulf Arab region has been hurt by some sukuk defaults and investor confidence has yet to return.

“I think it’s going to be another year or so before (sukuk issuance) gets back to pre-crisis levels,” said Daud Vicary Abdullah, head of Islamic finance at advisory firm Deloitte.

He said that new markets will help a come back in sukuk issuance, as governments in Brazil, Australia, Western Europe and Central Asia are considering issuing sukuk to tap the Muslim wealth pool and nurture their own Islamic financial industries.

He said that American re-insurers are considering entering Islamic re-insurance business, or re-takaful, which would also increase demand for Islamic bonds.

The global financial crisis popped a Gulf real estate bubble in 2008, severely hitting regional investors and pushing the region’s business hub Dubai to the brink of default.

Investors are still holding back their funds as the full extent of the damage took long to surface due to a lack of strong and transparent regulations in the region.

“This market is always much more sensitive to economic ups and downs…there is still some ground to make up and people are sort of nervous about what they have seen in Dubai,” said Abdullah.

The Gulf saw a modest revival in sukuk issuances in the last quarter of 2010 but market experts fear it could be a fragile recovery with investors fearful of any more bad news. [ID:nLDE69618P]

Sukuk issuance has also been hurt by a debate about the compliance of some of its structures with Islamic law. Sukuk are structured around underlying assets, from which returns to bondholders are derived.

Estimates of sukuk issuance can vary significantly depending on the methodology applied.

Experts polled by Reuters in October estimated that sukuk issuance will likely be less than $25 billion as Gulf debt restructurings and state deficit constraints dampen borrowing.

Source: http://sg.news.yahoo.com/rtrs/20110111/tbs-sp-islamicfinance-sukuk-7318940.html