News Column

Asian governments join sukuk rush

August 9, 2014

Hong Kong, Indonesia and Pakistan are banking on pent-up investor demand as they look to raise up to a combined US$3.5bn in the fast-growing Islamic bond market.

The three sovereign sukuk issues, including a planned US$1bn debut from Triple A rated Hong Kong, are set to launch before the end of September.

Few Asian issuers have targeted the global sukuk market in the past, and the glut of deals comes as governments across Asia are looking to attract Islamic investors from outside the region.

"There are a lot of Islamic investors from the Middle East looking for diversification and new investment opportunities," said Ahsan Ali, Standard Chartered Bank's managing director and global head for Islamic origination.

"Historically, these investors were mostly investing in Europe and US, but over the past few years, we have seen growing investment allocations to Asia as they move to diversify their assets," Ali said.

Indonesia, home to the world's biggest Muslim population, is Asia's only regular issuer in the global sukuk market, having issued annually since 2010. Pakistan has sold Islamic debt overseas only once before, in 2005, while Malaysia has typically preferred to target its own domestic market.

The addition of more Asian sovereigns to the market comes amid growing interest in the sukuk format among borrowers across the globe. The UK priced its first sukuk this year, while Luxembourg, Tunisia, South Africa are among other governments considering a debut.

"This year has been unique with issues coming from outside the traditional market in the Middle East," said Mohammed Dawood, HSBC's global head of sukuk financing. "The UK government sold a 200m (US$336m) bond in June, and other sovereigns are looking at the market.

"This helps to internationalise the product as a mainstream instrument that can be used as an alternative funding source."

For Islamic investors, the boost in supply cannot come soon enough. Ernst & Young projects the growth of the Islamic banking industry will drive demand for sukuk to US$900bn in 2017, up from US$300bn just over a year ago. Globally, assets held by Islamic investors rose to US$1.8trn at the end of last year, marking an annual growth rate of about 17.6% over the last four years.

Asia's sovereigns view the upcoming offerings as an opportunity to set benchmarks for companies to follow, as well as a chance to expand their own investor base.

Hong Kong is expected to sell a US$500m-$1bn sukuk in September via joint leads CIMB, HSBC, National Bank of Abu Dhabi and Standard Chartered. Conventional as well as Islamic investors are likely to snap up the debut from a rare Aa1/AAA/AA+ rated issuer.

"If (conventional) investors want access to a certain credit, and if sukuk is the only way they can get hold of the credit, they will definitely buy it," said a Kuala Lumpur-based debt banker.

Bankers hope Indonesia can beat Hong Kong to market with a US dollar sukuk of up to US$1.5bn in late August, after the end of Eid al-Fitr, the festival marking the end of the Islamic holy month of Ramadan.

Roadshows are planned for the middle of August. Indonesia is rated Baa3/BB+/BBB-. CIMB, Emirates National Bank of Dubai, HSBC and Standard Chartered are joint bookrunners.

Pakistan, with the lowest rating of the three at Caa1/B- from Moody's and Standard & Poor's, will appoint lead banks in the coming days, according to a finance ministry official.

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Source: Daily Messenger (Pakistan)

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