Fitch Ratings said that strong demand would ensure that sukuk issuance would grow in 2013, mainly in originator-backed, also called asset-based, sukuk structures.
The sukuk market is growing rapidly. 2012 global sukuk issuances are expected to hit $121billion according to Thomson Reuters. This follows a strong year in 2011 where issuance was $84.4billion, a 62% increase on 2010, according to Zawya Sukuk Monitor.
Confidence and investor sentiment toward Islamic bonds have contributed to growth, however, limitations remain. One of the man limitations is the legal precedents in terms of effective enforcement in many jurisdictions where sukuk issuance is prevalent. As such, it remains uncertain whether certificate holders will be able to enforce their contractual rights in local courts. Fitch also believes that sukuk do not have a standard structure and each structure may involve differing underlying contractual arrangements. As a result, each structure has to be reviewed individually to assess whether it fits within these criteria.
Currently a rating is only mandatory in Malaysia but not in the GCC, however there is no doubt that sukuk rating is an important element of improving the confidence in this growing instrument. Fitch is of the view that the majority of sukuk will continue to come from originator-backed (also called asset-based) in which investors rely upon direct support features (i.e., the repurchase agreement and liquidity arrangements), as well as upon the originator/issuer’s ability to generate profits with the assets.
Fitch also expects that there is an opportunity to see shariah-compliant debt in sovereigns that have not yet tapped the sukuk market, such as Egypt, Libya, Oman and Tunisia, and this would be likely to generate strong investor appetite. In 2012 the Turkish government entered the Islamic capital market in September 2012 with a USD1.5 billion Eurobond issuance, considered a key driver to establish a benchmark and to encourage the development of the sukuk market in Turkey. Jordan passed a law paving the way for sovereign issues in mid-September 2012.
Additionally, France, South Korea and South Africa have stated their interest in tapping the sukuk market. Fitch still sees that issuers from outside the Islamic world could contribute more eventually to the increase in supply as they diversify their investor base.
Sovereigns would be well placed to tap demand, as they are unlikely to have to struggle to find assets that qualify to back shariah-compliant bond issuance.