Malaysia’s efforts to link its world-leading Islamic bond market with the global investor base took a big step forward earlier this year with the first offshore corporate sukuk. Confidence is high that the region’s other corporate issuers will be able to follow suit.
Source: Reuters/Damir Sagolj
A US$800m global sukuk from Malaysian conglomerate Sime Darby this January generated high hopes that more companies from the country or, indeed, elsewhere in South-East Asia, would be able to gain footholds in the Islamic market for US dollars.
Sime scored with the lowest coupons of all time at 2.053% for the five-year tranche and 3.290% for the 10-year in the global sukuk market, showing that the world’s biggest Islamic funds were willing to welcome Malaysian companies at competitive terms.
The huge buzz that has followed in the corporate sector in Malaysia is translating to an increased number of enquiries, some as advanced as requests for proposals to banks.
“They are all looking at establishing programmes and seeking an opportunity to sell sukuk in US dollars and other currencies, just as Sime did and as Axiata did last year in its Dim Sum issue,” said Rafe Haneef, CEO of HSBC Amanah Malaysia.
While many Malaysian issuers have experience with Islamic bonds in the country’s domestic markets, the successes of Sime and Axiata have helped spread the idea of tapping the offshore Islamic investor base.
“Interestingly, shareholders and senior management officials are a lot more encouraged and are showing greater passion for such sukuk structures,” said the head of regional debt capital markets at a bank in Kuala Lumpur.
It is not just a coincidence that these corporate borrowers are finally waking up to the fact that there is a rapidly growing Islamic investor base.
Demand outstrips supply in the global Islamic bond markets. Last year, sukuk issuance worldwide hit US$131bn, up 54% from 2011, according to analysts at Kuwait Finance House.
Meanwhile, Ernst & Young has estimated that annual demand will increase to US$900bn in 2017.
The gap reversed an illiquidity premium demanded from sukuk issuers three to four years ago. Islamic bonds now trade marginally tighter than conventional bonds, reflecting the huge pent-up demand for the paper.
Recent months, however, have seen more Middle Eastern or Gulf issuers access the US-dollar markets, while Asian issuers have remained on the sidelines. Some bankers are not optimistic about the pipeline, pointing to the costs and resources involved in setting up multi-currency sukuk structures.
“The economic reality is that not many corporate issuers will rush out to tap cross-border sukuk markets in the near future,” said another Kuala Lumpur debt banker. “The question issuers will ask is – do they have US-dollar funding needs, and, if not, does it make sense to spend time and money in working out the structures involved in US-dollar deals when they have easy access to local funding avenues?”
Undoubtedly, pricing will be the deciding factor, although other benefits, such as diversifying one’s funding sources, and expanding an investor base, also often play a role. However, Malaysia’s vibrant domestic Islamic bond market could work against the government’s goal of developing the country into an international sukuk centre.
It is a refrain Haneef has no hesitation to echo. “Malaysia has the deepest sukuk market in the world, but all the bonds are in the local currency. There is too much reliance on the domestic market. It is one big local market, but to be a global sukuk hub, it needs more issuers to come out of Malaysia to tap the offshore sukuk market. The government needs to push issuers out to diversify from just funding in ringgit.”
It is a similar story for Indonesia, home to Asia’s largest Muslim population. Indonesia has lagged Malaysia in developing its Islamic finance infrastructure. However, it is on the cusp of moving forward, particularly after the government committed itself to a sukuk law last year that will give tax neutrality on Islamic bonds. At the same time, Indonesia was upgraded to investment-grade status, adding to its appeal to cautious Islamic fund managers.
These two factors combined have encouraged Indonesian corporations to consider offshore sukuk sales. Indeed, some are already actively exploring the avenue. Haneef is confident that at least one Indonesian corporate sukuk will emerge in the offshore markets this year.
A promising impetus could come from ASEAN regulators pushing for more regional co-operation in Islamic capital markets as part of the ASEAN Capital Market Forum’s Master Plan to integrate the region’s capital markets and spur intra-regional economic growth.
Such efforts could take on new energy as other regions move ahead with plans to develop into sukuk hubs. Dubai, for instance, recently launched a massive initiative to become a global centre for Islamic finance.
These aspects will provide a catalyst to the further development of the global Islamic bond industry, a move that will eventually also benefit existing and upcoming centres, such as Malaysia and Indonesia.
“There is room for more than one Islamic finance hub in Asia, just as there several financing hubs for conventional bonds in the region and we can see how successful these have been,” said Henrik Raber, global head of debt capital markets at Standard Chartered Bank.
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