sukuk perceptions and forecasts - by mohammed al sharaf - icompetences ifc2012

ISLAMIC FINANCE GATEWAYTHE PULSE OF THE ISLAMIC FINANCIAL MARKETS

SUKUK PERCEPTIONS AND FORECAST FOR 2013IFS 2012 Mohammed Al Sharaf, MBA Islamic Finance Advisor – Thomson Reuters

Marrakech – Morocco


SUKUK PERCEPTIONS AND FORECAST FOR 2013

AGENDA

HISTORICAL TRENDS OF THE GLOBAL SUKUK MARKET

INVESTORS BEHAVIOR AND INVESTMENT APPETITE FOR SUKUK

MARKET

SUBSTANTIAL ANALYSIS ON THE DEMAND AND SUPPLY IN THE GLOBAL

MARKET OF SUKUK


LOOKING BACK, WE FIND...KEY HISTORICAL TRENDS


SUKUK ISSUANCE HAS GROWN BOTH IN TERMS OF VOLUME AND ISSUER AND INSTRUMENT DIVERSITY...

1990 - 2000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Q3 20120

10

20

30

40

50

60

70

80

90

100

110

120

130GLOBAL SUKUK TIMELINE (1990 - Sept 2012)$ blns

Kumpulan Guthrie Bhd World's 1st Int'l Corporate Sukuk

Malaysia 1st Int'l Sovereign Sukuk

IDB 1st Int'l Quasi-Sover-eign Sukuk

Caravan 1st Asset-Backed Sukuk

Dawama 1st Hybrid Sukuk (Ijara-Murabaha)

World Bank 1st Sukuk

Cagamas World's 1st Resi-dential Mortgage Sukuk

Durrat Al Bahrain 1st Int'l Hy-brid Sukuk (Ijara -Is-tisna)

Khazanah Nasional World's 1st Int'l Exchange-able Sukuk

Nakheel Sukuk, Dubai Real Estate Boom

Saad Group De-fault

DP World An-nounces Default

Mufti Taqi Usmani criti-cises 85% of sukuk as not sharia-compliant

Indonesia 1st Domes-tic Sovereign Retail Sukuk

ADIB Tier 1 Sukuk to Govt of Abu Dhabi

Danga Capital World's 1st Ren-minbi Sukuk

General Electric 1st USA Corporate Sukuk

NBAD 1st Ringgit Cross Border Sukuk

Qatar QR33 bil-lion Sukuk

Bank Al Jazira Tier 2 Sukuk

Pakistan Proposes New Sukuk Rules

Jordan Passes Sukuk Law

Axis 1st REIT Sukuk

Qatar 4 billion Eu-robond

Shell MDS Sdn Bhd World's 1st Ringgit Sukuk (1990)

Central Bank of Bahrain 1st Series of Int'l Sovereign Short Term Sukuk

Shell MDS Sdn Bhd, Malaysia

Govt of Bahrain

Indosat, Indonesia

Solidarity, KSA

Tabreed, Financing,

UAE

Govt of Pakistan

Govt of Brunei

Central Bank of Sudan

Central Bank of The

Gambia

Monetary Authority of Singapore

Nomura Holding,

Japan

Central Bank of Yemen

DBK, Kazakhstan

Qatar Global Sukuk

Saxony-Anhalt,

Germany

Al Safeena, UK

East Cameron Gas Co., USA

Kuveyt Turk, Turkey

Al Rajhi CementJordan

, JordanThe

Commercial Real Estate Co., Kuwait

Source: Thomson Reuters Zawya


...MOST SUKUK HAVE BEEN DEBT BASED AS MAJORITY ORIGINATED IN MALAYSIA.. HOWEVER, INVESTMENT BASED SUKUK

SLOWLY CATCHING UP...


2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Q3 YTD 2012

0

20

40

60

80

100

120

GLOBAL DEBT STRUCTURE SUKUK VS INVESTMENT STRUCTURE SUKUK HISTORICAL TREND ( Jan 02 - Sep 12)

Debt Based Sukuk Structure Investment Based Sukuk Structure

$ BILLION


...INTUITIVELY, REAL ESTATE, FINANCIALS AND OIL AND GAS COMMAND A DISPROPORTIONATE SHARE OF ISSUANCES IN THE

MENA REGION...

0

5

10

15

20

25

30

35

40

45

50

0

50

100

150

200

250

300

350

400

56

7 11 80

31

09 4 4

215

237

216

360

55

107

24

83

8

215

MENA vs MALAYSIAN CORPORATE AGGREGATE SUKUK ISSUED BREAKDOWN BY INDUSTRY (Jan 96 - Sep 12)

Malaysian Sukuk MENA Sukuk Malaysian Number of Issues MENA Number of Issues

$ blnNumber of Issues



2005 2006 2007 2008 2009 2010 2011 20120

20

40

60

80

100

120

60

70

80

90

100

110

DOW JONES GLOBAL SUKUK INDEX PRICE MOVEMENT (Oct 05 - Sep 12)

Sukuk Issued Price Movement

$ bln Index Price

Boom of Sukuk Market

Dubai Debt Crisis

Sukuk rallies and becomes in-vestors choice over US & Euro-pean ow market yields

Nakheel deafults & Abu Dhabi Government bails outDubai

Sukuk enjoys exceptional favorable pricing compared to conventional bonds (Cheaper by 50 bps as per HSBC data)

AAOIFI comments that 85% of sukuk are not sharia compliant

...WHILE PERFORMANCE AND ISSUANCE DIPPED DURING THE FINANCIAL CRISIS, SUKUK LARGELY REBOUNDED TO PROVIDE

EXCEPTIONAL PERFORMANCE GOING FORWARD ...

Source: Thomson Reuters EIKON


...YET SUKUK UNDERPERFORMED THIS YEAR WHEN COMPARED TO THEIR EMERGING MARKETS PEER...

1-Ja

n-12

8-Ja

n-12

15-Ja

n-12

22-Ja

n-12

29-Ja

n-12

5-Fe

b-12

12-F

eb-1

2

19-F

eb-1

2

26-F

eb-1

2

4-Mar

-12

11-M

ar-1

2

18-M

ar-1

2

25-M

ar-1

2

1-Apr

-12

8-Apr

-12

15-A

pr-1

2

22-A

pr-1

2

29-A

pr-1

2

6-May

-12

13-M

ay-1

2

20-M

ay-1

2

27-M

ay-1

2

3-Ju

n-12

10-Ju

n-12

17-Ju

n-12

24-Ju

n-12

1-Ju

l-12

8-Ju

l-12

15-Ju

l-12

22-Ju

l-12

29-Ju

l-12

5-Aug

-12

12-A

ug-1

2

19-A

ug-1

2

26-A

ug-1

2

2-Se

p-12

9-Se

p-12

16-S

ep-1

2

23-S

ep-1

2

30-S

ep-1

2

7-Oct

-12

14-O

ct-1

2

95

100

105

110

115

EMERGING MARKET INDICES VS SUKUK INDICES PERFORMANCE

Thomson Reuters Global Sukuk Index JPMorgan Emerging Markets Bond Index .DJSUKUK

Index price



...BUT IN MARKED IMPROVEMENT IN QUALITY, MOST OUTSTANDING SUKUK ARE USUALLY STRUCTURED TO COMPLY WITH AAOIFI STANDARDS / GUIDANCE AND

BACKED BY ASSETS...

Asset Backed

65%

Project Backed

3%

Asset Based22%

Hybrid10%

OUTSTANDING INTERNATIONAL SUKUK BREAK-DOWN

BY RISK CLASSIFICATION AS OF SEPTEMBER 30, 2012

AAOIFI Com-pliant72%

AAOIFI non

Com-pliant28%

OUTSTANDING INTERNATIONAL SUKUK BY AAOIFI COMPLIANCE AS OF SEPTEMBER 30,

2012



LOOKING TO THE FUTURE....SURVEY FINDINGS


I NEED DOLLARS... CURRENCY AND MARKET OF ISSUE PREFERENCES


INTERESTINGLY, ARRANGERS EXPECT A GOOD BALANCE BETWEEN LOCAL AND INTL. SUKUK WHILE INVESTORS GLOBALLY HAVE AN OVERWHELMING PREFERENCE FOR INTL SUKUK

Buy Side – Preference

South East Asian investors more keen to invest in domestic markets most likely due to excess local currency liquidity and better rates

International – Eurobond

Domestic – Local currency

20% 40% 60% 80%

71.7%

28.3%

53.6%

46.4%

SELL SIDE - Expectation

BUY SIDE - Preference

Asia Pacific

GCC

Rest of the world

0% 20% 40% 60% 80% 100%

International – Eu-robond

Domestic – Local currency


AND THIS IS REFLECTED IN THEIR DEMAND FOR US DOLLAR SUKUK


Perhaps surprisingly, there is some demand for Euro sukuk

…INVESTORS PREFER US DOLLAR OVERALL, BUT THERE IS GROWING APPETITE FOR OTHER CURRENCIES SUCH AS MALAYSIAN RINGGIT AND SAUDI RIYAL …

Indonesia Rupiah

US Dollar

Saudi Riyal

Malaysian Ringgit

Euro

Other

0% 10% 20% 30% 40% 50% 60% 70% 80%

0.0%

77.8%

6.1%

4.0%

4.0%

8.1%

0.0%

48.1%

11.1%

37.0%

3.7%

0.0%



Asia Pacific

GCC

Rest of the World

0% 20% 40% 60% 80% 100%

Indonesian Rupiah

US Dollar

Saudi Riyal

Malaysian Ringgit

Euro

Other


NEW HORIZONS OR COMFORT ZONE?GEOGRAPHIC AND RISK PREFERENCES


SELL SIDE ARRANGERS EXPECTATIO

N

BUY SIDE INVESTORS PREFERENCE

High correlation between investors preference and arrangers expectation of sukuk issuance countries

INVESTORS STILL PREFER TO INVEST IN CORE SUKUK TERRITORY - TRADITIONAL GCC AND SOUTH EAST ASIA COUNTRIES WHILE ARRANGERS EXPECT A SIMILAR PATTERN

FranceGermany

ItalyOman

IndonesiaUSA

OtherKuwait

BahrainSingapore

UKQatar

Malaysia

Saudi Arabia

UAE

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

0.0%0.0%0.0%

2.2%3.7%3.7%3.7%

5.2%6.0%

7.5%8.2%

12.7%14.9%

15.7%16.4%

Other

Pakistan

Singapore

Indonesia

Bahrain

Malaysia

UAE

Saudi Arabia

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

4.1%

5.5%

9.6%

11.1%

16.2%

17.1%

17.3%

19.2%

GCC AND SOUTH EAST ASIA STILL COMMANDS HIGHEST PREFERENCE FROM INVESTORS

OUTLIERS


ARAB SPRING AND CIS COUNTRIES WOULD BE BEST PLACED TO ISSUE SUKUK GIVEN THE DISPROPORTIONATE SHARE OF INVESTOR PREFERENCE FOR THEIR PAPER

..WITH HIGH EXPECTATIONS FROM EMERGING ISLAMIC FINANCE COUNTRIES TO ENTER THE SUKUK MARKET..

Kenya

Yemen

Other

Morocco

Azerbaijan

Libya

Tunisia

Kazakhstan

Oman

Egypt

0% 10% 20% 30% 40% 50% 60% 70% 80%




GFC JITTERS STILL PREVAILS WITH SOVEREIGN (LINKED) OR FINANCIALS REMAINING THE FAVOURITES

Real Estate

Power & Utilities

Telecommunication

Oil & Gas

Financial Services

State linked

Quasi-Sovereign

Sovereign

0 2 4 6 8

3.0

3.6

4.0

4.0

4.5

5.0

5.8

6.2

4.0

4.2

4.3

3.1

5.4

3.8

5.7

5.5



WHILE INVESTORS STILL SHYING AWAY FROM CORPORATES…


CHASING RATINGS...


Despite Asian investors mostly preferring investment grade issues, they are more open to other options

…INVESTORS STILL PREFER TO INVEST IN SUKUK THAT ARE RATED AND INVESTMENT GRADE AND ABOVE. ..

Sub-Investment Grade (BB or B)

Indifferent

Investment Grade (BBB- / Baa3 and above)

A and above

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

8.1%

8.1%

67.7%

16.2%

7.1%

3.6%

82.1%

7.1%

SELL SIDE - Expectation BUY SIDE - Preference

Asia Pacific

GCC

Rest of the World

0% 20% 40% 60% 80% 100%

Sub-Investment Grade (BB or B)

Investment Grade (BBB- / Baa3 and above)

Indifferent

A and above

Strongly Dis-agree

2 3 4 5 6 Strongly

Agree

0

5

10

15

20

25

30

35

40

0

0.05

0.1

0.15

0.2

0.25

Buy Side: Rating of sukuk is important for my investment decision

Fre

qu

en

cy

Mean: 5.18Mode: 7

SD σ: 2.068


..AND LARGELY FAVOR ASSET BACKED SUKUK ..MOST INVESTORS PREFER ASSET BACKED SUKUK AS THEY ARE MORE SECURE AND GRANT RECOURSE TO BOTH THE OBLIGOR AND THE UNDERLYING ASSETS

Asset-Based Sukuk

Asset-Backed Sukuk

Project-Backed Sukuk

0% 10% 20% 30% 40% 50% 60% 70% 80%

21.4%

69.4%

9.2%

48.1%

33.3%

18.5%

SELL SIDE - Expecta-tion

Asia Pacific

GCC

Rest of the World

0% 20% 40% 60% 80% 100%

Asia Pacific

GCC

Levant

Rest of the World

0% 20% 40% 60% 80%100%

Project-Backed SukukAsset-Based SukukAsset-Backed Sukuk


AND STILL CONSERVATIVE ON TENOR …


The market is still averse to longer term papers

UNLIKE CONVENTIONAL BOND INVESTORS, ISLAMIC INVESTORS STILL PREFER SHORTER TERM PAPERS., POSSIBLY REFLECTING THE BANK HEAVY INVESTOR BIAS

Less than 1 year

1-3 years

3-5 years

5-10 years

10 years and above

0% 10% 20% 30% 40% 50% 60% 70% 80%

3.0%

17.2%

52.5%

26.3%

1.0%

0.0%

7.4%

25.9%

66.7%

0.0%



Asset Management

Banking

Central Bank and Monetary Authororities

Conglomerate

General Financial Services

Investment Firms and Funds

Securities brokers and traders

Transpotation

0% 20% 40% 60% 80% 100%

10 years and above

5-10 years

3-5 years

1-3 years

Less than 1 year


WILL SUPPLY MEET DEMAND?

DEMAND AND SUPPLY EQUILIBRIUM ANALYSIS


SUPPLY

$125 billion - $150 billion

Above $150 billion

Less than $75 billion.

$100 billion - $124.9 bil-lion

$75 billion - $99.9 billion

0% 5% 10%15%20%25%30%35%40%45%50%

3.6%

3.6%

14.3%

35.7%

42.9%

What is the expected dollar amount of sukuk issuance in 2013?

Above 40 issues

35 - 40 issues

30 - 35 issues

Under 25 issues

25 - 30 issues

0% 10% 20% 30% 40% 50%

0.0%

3.6%

14.3%

35.7%

46.4%

What is the expected number of Eurobond (International USD) sukuk issuance in 2013?

2012 figures are around the $132 bln range.

Are arrangers being too conservative when projecting 2013 issuance levels?

Number of Eurobond issuances in 2012 were 25.

Are arrangers being too conservative when projecting 2013 issuance levels, when pipeline itself is around the 18-20 mark (Source: IFR)?

MOST ARRANGERS EXPECT ISSUANCE VOLUME AROUND THE $75-125 BLN RANGE WITH UP TO 30 EUROBOND ISSUES


DEMAND WHILE MOST ISLAMIC FINANCE INVESTORS WILL INVEST BETWEEN 20-100 PERCENT OF THEIR PORTFOLIO IN SUKUK AND LESS THAN OR AROUND $200 MLN

0 200 400 600 800 1000 120005

1015202530354045

0

0.0002

0.0004

0.0006

0.0008

0.001

0.0012In US dollar terms

$ (mln)

Frequency

0 20 40 60 80 1000

5

10

15

20

25

30

0

0.002

0.004

0.006

0.008

0.01

0.012

As a percentage of total portfolio

pct (%)

Frequency

ISLAMIC FINANCE INVESTMENT SUKUK INVESTMENT

0 200 400 600 8000

5

10

15

20

25

30

35

00.00020.00040.00060.00080.0010.00120.00140.00160.0018

In US dollar terms

$ (mln)

Frequency

0 20 40 60 80 1000

5

10

15

20

25

30

0

0.002

0.004

0.006

0.008

0.01

0.012

0.014

As a percentage of total portfolio value

pct (%)

Frequency


DEMAND AND SUPPLY EQUILIBRIUM

2008 2009 2010 2011 2012 2013 2014 2015 20160

50

100

150

200

250

300

350

400

450SUKUK DEMAND AND SUPPLY LEVELS (2012 - 2016)

Total Global Sukuk Matured Total Global Sukuk Issued Total Outstanding Global SukukTotal Outstanding Sovereign+Quasi Sovereign Sukuk Total Sukuk Demand

$ bln

Supply & Demand Gap: Sovereign & Quasi Sovereign sukuk issuance, and replacement of other investment grade papers will far from meet expected de-mand and the required level of is-suance.

WE PROJECT THAT SUKUK DEMAND WILL SURPASS SUPPLY BY ABOUT USD 250 BLN BY 2016 AT CURRENT SUKUK ISSUANCE GROWTH LEVELS


YET COST OF ISSUANCE STILL A HINDRANCE TO ACHIEVING DEMAND SUPPLY PARITYMAJORITY OF LEAD ARRANGERS BELIEVE THAT COSTS OF ISSUING SUKUK WILL STILL BE HIGHER THAN COSTS OF ISSUING CONVENTIONAL BONDS

Less than US$ 50K

$50K – $199K

$200K – $349K

$350K – $499K

Above $500K

5% 15% 25% 35%

28.6%

28.6%

21.4%

7.1%

14.3%

1%

2%

3%

4%

5%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

33.3%

46.7%

6.7%

6.7%

6.7%

Yes

No

0% 10% 20% 30% 40% 50% 60% 70%

40.7%

59.3%Sell Side – Expectations

The gap between the cost of issuing sukuk and the cost of issuing bonds is narrowing, due to bigger sukuk investor base (conventional + Islamic)


BUT BUYER BEWARE, SYSTEMIC SUKUK RISKS LOOMING..

STRUCTURE RISKS


STRUCTURE RISK REARS ITS UGLY HEAD AGAIN…

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD Q32012 0

2

4

6

8

10

12

14

16

18

INTERNATIONAL SUKUK ISSUED BREAKDOWN BY STRUCTURE (Jan 02 - Sep 12)

Ijara Musharaka, Mudaraba & WakalaHybrid Other

$ bln Structure Risk II Im-pact: Goldman Sachs $2 bln sukuk is put on hold after Commodity Murabaha structure questioned

Structure Risk I emerges: Mufti Taqi Usmani criticises 85% of sukuk (specifically Musharaka, Mudaraba and Wakala), as not sharia-compliant, due to Purchase undertakings at Face Value

Structure Risk II: Islamic Schol-ars Debate over Commodity Murabaha

Structure Risk I Im-pact: Musharaka and mu-daraba sukuk is-suances plunge

Structure Risk III: Ijara repur-chase un-dertaking questioned at the OIC Fiqh Acad-emy pro-ceedings, Sept 2012

SEVERAL PAST EXPERIENCES ON, POTENTIAL THAT THERE MAY BE ANOTHER STRUCTURE SHOCK TO SUKUK…


IJARAH STILL REMAINS FAVOURITE ..


Ijara and Wakala are most expected by lead arrangers, but Ijara is preferred by a majority of investors

DESPITE THE ISSUE WITH THE IJARA REPURCHASE AGREEMENT AT THE ISLAMIC FIQH ACADEMY, INVESTORS STILL PREFER IT OVER WAKALA …

Other

Hybrid

Murabaha

Mudaraba

Musharaka

Wakala

Ijara

0% 10% 20% 30% 40% 50% 60% 70%

1.0%

7.1%

10.2%

4.1%

3.1%

11.2%

63.3%

3.7%

22.2%

0.0%

7.4%

7.4%

29.6%

29.6%

SELL SIDE - ExpectationBUY SIDE - Preference

Asia Pacific

GCC

Levant

Rest of the World

0% 20% 40% 60% 80% 100%

Other

Hybrid

Murabaha

Mudharaba

Musharaka

Wakala

Ijara


ISLAMIC FINANCE GATEWAY - DATA - RESEARCH - CONSULTINGREACH US: [email protected]

FIND OUT WHAT WE DO: FINANCIAL.THOMSONREUTERS.COM/ISLAMICFINANCE

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THE RIGHT INFORMATION IN THE RIGHT HANDS LEADS TO AMAZING THINGS

sukuk perceptions and forecasts - by mohammed al sharaf - icompetences ifc2012

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