Intra-regional sukuk issuance in Asia has picked up over the past twelve months and Thailand and Singapore have gone public with their Islamic bond intentions this week, but any developments in the region are likely to be slow.
Malaysia is Asia’s sukuk hub. However – with the exception of Indonesia, which is slowly developing its own market – Islamic bond deals in Asia have been hard to come by. But state-owned Islamic Bank of Thailand (iBank) – rated ‘BBB-‘ by Fitch Ratings – looks set to issue a THB5 billion (US$163.96 million) sukuk, according to a Reuters report on June 3.
The bond is likely to have a maturity of five years and Malaysian bank CIMB has long been tipped to handle the deal. However, a spokesperson from the CIMB said nothing had yet been confirmed, and this deal has been discussed for almost a decade, with discussions beginning soon after the bank was first established in 2003.
But DCM bankers in Malaysia believe a deal could really be on the cards this year and that the Islamic capital markets are a natural fit for banks in non-Muslim countries across the Asian region.
“In countries like Thailand and the Philippines, which are not Muslim countries, there is no real government encouragement or support for Shariah financing, so they have to raise money from the Islamic markets,” said once Malaysia-based DCM head at a global bank.
“The government might say: here’s some dosh, here’s some start-up capital, but how you find the rest of is really up to you, as we can’t give you a shareholder loan in the form of Islamic capital.”
Because of this, as Islamic banks in the region grow larger and require more capital for their operations, they will need to issue Shariah compliant bonds.
In addition, as companies in the region grow more sophisticated, they will increasingly look to arbitrage markets, including the Islamic capital market. To date, this has only happened in the Malaysian ringgit.
The benefit of issuing in the Malaysian currency is that the market is the most liquid in Asia and in the past year there has been an increase in Asian intra-regional sukuk. In July last year, Indonesian company First Resources became the first non-Malaysian company in Asia to issue an Islamic bond in ringgit.
Noble Group Hong Kong followed suit in October, and Singaporean company Golden Assets International Finance issued a ringgit sukuk in November. All three have completed a second deal since, and First Resources issued a third deal on May 23 this year, according to Dealogic.
Close, but no cigar
It would seem to make sense for the iBank to issue in Malaysian ringgit. But it has chosen to issue the bond in its local currency, as the Malaysian market is predominantly open to higher quality names or companies that are familiar to domestic investors, according to DCM bankers.
“In Thailand, domestic investors are likely to be indifferent to whether or not the bond is Shariah compliant as long as the credit itself is acceptable to local buyers. This is a local state-owned enterprise, which typically has a good following in the market and if it’s structured and priced well investors will buy it,” said a head of DCM at a Malaysian bank.
For the past few years there have been occasional signs that countries in the region are preparing to develop domestic Islamic markets. Indonesia has been the most productive in taking steps to foster a rival sukuk market to Malaysia. The sovereign issued its debut rupiah-denominated sukuk in 2009 and has issued Islamic bonds periodically since then.
The government will auction its next batch of sukuk worth a total of IDR1.5 trillion (US$153.06 million) on June 11, according to Malaysian news agency Bernama. The auction will consist of three project-based bonds and one short-term bond.
However, the Indonesian sovereign is trapped in a vicious cycle whereby it has had to pay between 20bp and 60bp more to issue sukuk than regular bonds. This means it has been loath to fund too frequently through Islamic bonds. Because of this, the bonds remain illiquid and investors require a premium to compensate for the illiquidity.
Hong Kong has also suggested it would like to develop a sukuk market, but bankers are sceptical. Then deputy chairman of the Monetary Authority of Singapore (MAS) told Channel News Asia on June 4 that the city-state’s central bank is reviewing regulations and tax treatment of Islamic bonds in order to speed up the issuance of the first Singapore dollar-denominated sukuk.
However, developments have been slow, and in non-Islamic countries there is little need for regulators to push for market development. “We hope there will be more companies from Thailand or other countries in the region, but I think there is less momentum for that,” said the DCM head at the Malaysian bank.
Furthermore, the number of Islamic banks in Southeast Asia outside Malaysia and Indonesia is limited. Investors are fairly clued up on sukuk structures and are unlikely to become excited by an Islamic deal from a non-Islamic corporate, which means that companies are unlikely to achieve more favourable funding by issuing a sukuk as opposed to a regular bond.
“Investors across the region, whether they are in Malaysia or Hong Kong or Singapore, are well versed in the structures, so in the end it will just be a matter of the underlying credit. You can take the provincial girl and deck her out in Gucci but she will still be a provincial girl at the end of the day,” said the Malaysia DCM head at the global bank.