There is no denying the dazzling reception given to sukuk’s early arrivals in 2014. Dubai Investments Park, Export Import Bank of Malaysia (Mexim) and IsDB all drew large books and priced their deals at impressive levels. But the first two of these were small size (just $300m each) and from debut entrants in the market, while IsDB’s paper holds a unique position for regulatory and liquidity management purposes in being the only available triple-A rated sukuk.
A total $2.1bn combined haul by this stage is not bad for a market that is traditionally slow out of the blocks. And we hear of the dazzling new borrowers that promise to turn perceptions of sukuk on their head — the UK, Luxembourg, South Africa and rumoured European corporates to name a few — all the time.
But unlike previous years, the sukuk’s more bread and butter issuers have been slow to show their hand.
By this time last year, Dubai Electricity and Water Authority (Dewa) had triumphed with $1bn, while the Dubai government had taken $750m from the sukuk market, along with a $500m record tenor 30 year conventional note.
Go back to 2012 and the market had already digested Majid Al Futtaim ($400m), Emirates Islamic Bank ($500m), First Gulf Bank ($500m — its second benchmark sukuk in six months) and Tamweel ($300m).
A slow starting 2011 had still seen Emaar issue $500m by this stage.
A deal by any one of these issuers, or the likes of Abu Dhabi Islamic Bank, Dubai Islamic Bank, Emirates Airline and Qatar Islamic Bank, would provide a much clearer indication of how receptive the market is to core borrowers. But there is still little hint by any of them of when that will happen.
Each borrower no doubt has its own reason for holding back. Most have good cash positions and undaunting maturity schedules, so may feel they are in no rush. Given emerging market bonds’ susceptibility to China bubble fears, US Federal Reserve noise on quantitative easing plans, regional political upheaval and particularly the threat of crisis escalation in Ukraine, it is easy to sympathise.
But at least one such classic sukuk issuer is needed before any claims about pent-up demand and market potential can be substantiated.
It doesn’t even matter necessarily who buys sukuk. An influx of conventional investors for deals like IsDB’s is a promising sign itself, but it does matter that the market develop and sustain both core borrowers and investors, with each coming to rely upon the other. But It is hard to point to any examples of this at the moment.
A real test of market demand must be on the way, however. There are maturities coming up — in size order, Dubai has $1.25bn due in November, while TDIC has $1bn to address in October. Bahrain has $750m maturing in June, Indonesia $650m in April and Ras Al Khaimah $400m in July.
Whether these borrowers are happy to sit pretty, save on the cost of carry, and compete for space later in the year remains to be seen. But a strong result by a core borrower is much more likely to galvanise their plans — and the market in general — than debutantes and captive audience issuers, no matter how brilliantly they shine.