MAY 31, 2010
During the past week, there has been more talk of sukuk restructurings and -Tabreed missed a periodic payment on its sukuk, reflecting the continued fall out from the financial and economic crisis. Tabreed is the National Cooling Co. in Dubai and its missed payment may be a sign of a second-level impact from the property market collapse. Even as things continue to improve in general and new sukuk are issued, the last two to three years should not be forgotten. Islamic finance may have avoided the worst products that created and worsened the financial crisis, but it is still vulnerable to secondary effects transmitted through the economic and financial system. There is no way to avoid the impact of a recession so the lesson that should be taken from sukuk defaults is that overindebtedness, even if through Shari’ah-compliant financial instruments, will enhance the vulnerability of debtors, even as it will increase returns in good times. That is how leverage works; it is equally profitable on the way up as it is damaging on the way down.
Even while the impacts of the recession continue to play out, Malaysia issued its first dollar-denominated sovereign sukuk since 2002 (a five-year, $1.25 billion sukuk al-ijara). Despite general worries around the global debt markets, the sukuk was expanded to $1.25 billion with pricing on the low end of the expected range. While it is encouraging to see a new sukuk receive such interest, the question remains about whether this reflects a ‘flight to quality’ within the sukuk market. For the most part, new sukuk are coming from sovereign and high-grade corporate issuers. At the same time, sovereign issuers like the Indonesian finance ministry are announcing that their sukuk regularly have no winning bidders. While there has been a near absence of lower-rated issuers, there has been an increasing trend towards issuers using the Regulation 144A safe harbor exemption from registration (with the U.S. Securities & Exchange Commission). The advantage of Regulation 144A sukuk is that onshore US-based institutional investors are able to purchase the sukuk (which is not the case under the other safe harbor exemption, Regulation S). In the case of the Malaysian sukuk, which was a Reg. 144A sukuk, 15% of the investors were based in the US. If Islamic finance can grow to include more investors from the US, it will broaden the investor base and ultimately benefit the industry as a whole.
One topic that I am considering for a post in the next week is Islamic securitizations that have so far succeeded in avoiding ratings downgrades (in contrast to the East Cameron sukuk, which was also a securitization). There was a good article in the Financial Times about Sorouh’s Sun Finance securitization sukuk and the Tamweel residential MBS.
MAY 24, 2010
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This week was a busy week for the Islamic finance industry and sukuk markets in particular. The World Islamic Economic Forum also produced a few headlines. The Dubai World debt agreement was also announced (an agreement in principle at this point) with terms for creditors of $24 billion. As I mentioned on the blog, there was no specificity about whether the entire debt included in the restructuring was conventional or whether some of the debt was Shari’ah-compliant. If there were Shari’ah-compliant debt included, there should have been more clarity provided about what (if any) role Shari’ah scholars played in restructuring the debt to remain Shari’ah-compliant and within the terms of the debt restructuring. An additional issue is whether in the wake of the restructuring agreement which saw creditors receive pushed out maturities, lower interest rates and payment of no more than 60 cents on the dollar (in contrast to the fully paid Nakheel 2010 and committed repayment of the 2011 sukuk) could have a fallout within the Islamic finance industry. If conventional creditors believe that Islamic finance leads to sukuk being de facto senior to conventional bonds, it could make conventional issuers more hesitant to bring sukuk to market fearing that when they need to roll over their conventional bonds, creditors will balk or demand higher yields.
In a separate piece of (good) news, Malaysia is issuing a sovereign 5-year, dollar-denominated ijara sukuk expected to be be larger than its first (and most recent) $600 million sukuk issued in 2002. This will provide more pricing guidance for issuers, particularly Malaysian corporates wanting to tap global (non-Ringgit) sukuk markets. The order-taking is expected to begin in about 10 days and once it is completed and the sukuk issued, it will be interesting to see what markets (e.g. NASDAQ Dubai, LSE, Bursa Malaysia, LOFC) the sukuk is listed on. In my blog post (below) I express concern that there is still few sovereign issues that provide a pricing benchmark for longer-maturity (10+ years) and I believe that those would be useful for new issuers.
I hope this inaugural issue of the weekly newsletter was useful and once again, I welcome your feedback.