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Analysis & Insights

Upbeat Sukuk Market set for Continued Growth

24 Nov 2021

Sukuk issuances remain buoyant across the Middle East and elsewhere in the Islamic world, in an increasingly active market, as Gulf Cooperation Council ("GCC") economies re-emerge from the COVID related slowdown and a period of lower oil prices.

According to the International Islamic Financial Market's 2021 Sukuk Report1, 2020 was a record year for sukuk.  There were US$174.6 billion issued globally, which was an increase of 19.86%, propelled by economic stimulus packages from issuing governments and the positive global economic backdrop.  Sovereigns and financial institutions continued to print deals in significant supply, with refinancing requirements and demand for both shorter and long term maturities also notable.  Sukuk issuance so far in 2021 has maintained the positive track and expectations point to stability in the market at these elevated levels.  A report by Fitch Ratings2 indicated that strong investor appetite would drive activity for the remainder of 2021 and beyond, after global outstanding sukuk reached US$754.1 billion in Q2 2021, a 5% increase on the previous quarter.  For tenors of 18 months or more, issuance from the primary sukuk centres, including the GCC, rose by 136% on the previous quarter, with the sukuk share of the total funding mix more than doubling to 36%. Moody's, in its February 2021 report, said while sukuk issuances may pull back modestly this year, the long term growth trend remains intact, with US$99 billion long term sovereign issuances expected for 2022. While economic recovery will narrow fiscal deficits of major issuing sovereigns, over US$41 billion in maturing notes will need to be refinanced, with Saudi Arabia a major component of that.
This activity is taking place amid a rapidly improving economic backdrop. In a recent report, the World Bank said that GCC economies are expected to grow by 2.2% this year, having contracted by 4.8% in 2020.  The picture is seen brightening further, with annual average growth of 3.3% in 2022–23, although any sustained fall in the price of oil could see that reassessed.

MENA Corporate Funding Mix 

While sovereign, financial institutions and supranational issues comprise the majority of sukuk bonds coming to the market, corporate activity remains an important contributor.  A landmark issuance from energy company Saudi Aramco added US$6 billion to the count with its sale in June of this year. The oil giant's first US dollar denominated sukuk was also the largest corporate sukuk issued to date.  The company, which raised US$25.6 billion in the world's largest IPO in 2019, reportedly issued sukuk rather than conventional bonds due to high demand for the product, with scant supply of US dollar sukuk sales in the Gulf this year.  The continued reach for yield is also helping propel investor demand in a low rate environment, creating opportune conditions for issuers to access the capital markets through this product, particularly after the hit to their finances from COVID-19 and the subsequent drop in oil prices.

In the UAE, Dubai Islamic Bank ("DIB") launched its second international sukuk, with a US$1 billion five-year deal in June, achieving its lowest ever pricing.  DIB is the largest Islamic bank in the UAE, following its acquisition of Noor Bank.  Among other notable deals the Maples Group has been involved with, First Abu Dhabi Bank, the largest UAE bank by assets, issued a five-year US$500 million sukuk, which it said was three times oversubscribed and registered the tightest pricing on any five-year US dollar paper from the MENA region.

An interesting development in the Middle East is the project to create a unified global legal and regulatory framework for Islamic finance3.  The initiative between the UAE Ministry of Finance, the Islamic Development Bank ("IDB") and the Dubai Islamic Economy Development Centre ("DIEDC") meets demand for greater standardisation in the sector and places the UAE at the forefront of efforts to develop and expand the role of Islamic finance.

Issuing Vehicle Trends

One factor that remains consistent in this market is the strong preference for a Cayman Islands exempted company as the issuing vehicle.  Typically in these structures, the company's shares are held pursuant to a declaration of trust by a corporate services provider such as the Maples Group, which also provides the directors to the company.  This ensures that the ownership and control of the issuing vehicle are separate from the sponsor and obligor, which is pivotal for compliance with Islamic finance principles and affords the necessary bankruptcy remoteness in the event of an insolvency of the underlying obligor.

The Maples Group has long-standing expertise in Islamic finance and is highly commended for its market knowledge in this sector.  Having established a presence in Dubai in 2005, the group provides the full complement of services required for a successful transaction.  This includes the provision of independent directors to the issuing vehicle, alongside cutting-edge legal counsel from our law firm Maples and Calder.  With unparalleled regional know-how and a robust institutional infrastructure, our fiduciary professionals bring strength and depth in governance to the sukuk market, to ensure optimal structuring and full compliance with all relevant regulations.

1 International Islamic Financial Market, Sukuk Report, July 2021.

2 Fitch Ratings, Global Sukuk Market Growth to Continue in 2021 and Beyond, July 2021.

3 UAE Launches Initiative to Build Unified Global Legislative Framework for Islamic Finance, May 2020.



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