Recollections of GE’s 2009 sukuk suffer from its initial secondary market performance (dropping two points) and ideas that it was not a very Islamic exercise from who issued it, to who arranged it and who bought it. But it is time the deal enjoyed a reassessment, having achieved the company’s aims and provided a decent investment for those who chose to buy and hold it.
With other western borrowers examining the market this year, GE deserves credit for blazing a blue chip trail rather than scorn for any sort of failure.
EuroWeek received positive feedback from readers of last week’s article “Hopes rise of Western corporate sukuk, banks wish for GE, Total”. Market participants think that Western corporate sukuk has become a much easier concept to sell than it was in 2009.
Issuance for the likes of GE and Total has long been about strategic funding and sukuk is an increasingly valuable tool to have in the belt.
With the benefit of hindsight, even back in the post-financial crisis years that was the case. Why else would 1Malaysia enjoy all-time low yields even as Spanish and Greek CDS soared? Why did Indonesia come to market so soon after Lehman Borthers had gone under? Using sukuk allowed them to anchor Gulf Cooperation Council investors looking for dollar liquidity.
Those trades were 20%-30% anchored before the roadshows started, say Gulf syndicate officials. The message they take from this is that, at times when the conventional market is tough, the sukuk market can buck the trend.
It is a nice pool to tap if you can do so, but it just takes time to make a name for the unusual suspects. GE is no longer a such an issuer. If it wants to come back to the market when its 2009 sukuk matures in November this year it is well ahead of the pack.
Some of the criticism GE took in November 2009 was that it failed to draw local demand. The local Gulf buyers of its paper would have included its joint lead managers Bank Islam Brunei, Liquidity Management House, National Bank of Abu Dhabi, but perhaps few others.
But one reason was that regulation in various GCC countries back then was biased towards lower investment grade holdings offering higher yields. These days, regulations place greater impetus on rating, pushing people’s comfort zones up the curve. An issuer of GE’s stature in 2014 might well find it easier to garner GCC interest in 2014.
Technical factors are even stronger, however. Given the growing pool and diversity of sukuk investors, the lack of issuance to fill that demand amounts to starvation. The sukuk market has only seen $600m of international issuance so far this year from two issuers — both new entrants to the market. Sukuk market growth, if it is to happen, needs to come from non-traditional sources like this.
There are other reasons why next time round GE will find a wider, more responsive set of buyers. Blue chip sukuk will be very well received due to the diversification on offer (a key issue for Shariah compliant investors), a greater volume of buy-side assets under management being higher compared to five years ago looking to be invested, a stronger understanding of sukuk from conventional investors, and greater liquidity in the sukuk market.
A deal from a western corporate would also demonstrate commitment to the market reassuring investors that this was a borrower worth engaging in for the long-term.
Western corporates can need no further encouragement than to enter the sukuk market.