Oman’s first sukuk approved

Oman’s first corporate sukuk has received regulatory approval and the 50 million rial ($130m) private placement aims to close next month.

The five-year sukuk will be issued by Tilal Development Co, a leading real estate firm, and the proceeds will be used to repay existing debt and expand the Muscat Grand Mall.

If it is successful, the issue could pave the way for other companies to sell Islamic bonds.

“We have already done our roadshows and also got some commitments from pension funds locally,” Mohsin Shaik Sehu Mohamed, head of Islamic finance at Al Madina Investment, told Reuters.

“Now the target is to close this deal. We are trying our best to close it in July.”

The sukuk, rated BBB+ by Capital Intelligence, will pay a 5% profit rate and use an ijara structure, a common shariah-compliant leasing arrangement.

Al Madina says it has other Omani sukuk in the pipeline, with one deal targeted for later this year.

“We have two more in the pipeline - one government-related entity and one family-owned company,” Mohamed said.

Omani domestic investors such as pension funds and insurance firms have expressed an interest and it could have a broader regional appeal, in particular from Qatar, Mohamed added.

The corporate sukuk could also be welcomed by local Islamic banks, which are eager for access to more shariah-compliant investment products while Oman’s Islamic money markets are underdeveloped.

There is talk of the government considering a sovereign sukuk, which is expected to be issued next year.

Sukuk: Heading for the mainstream

With more and more sovereigns and corporates looking to raise money through sukuk – in response to strong investor demand – Islamic finance is becoming increasingly mainstream. Are regional asset managers well positioned to take advantage?

The growth of the market for sukuk – Islamic bonds - over the last few years has been staggering and experts predict that 2013 will continue that trend, particularly in the Gulf Co-Operation Council (GCC) countries and wider Mena region.

Investors within the emerging markets space as well as internationally have had a taster and are hungry for more sovereign as well as corporate issues. Worldwide issuance was $138bn in 2012, its fourth consecutive year of growth, and up 64% on 2011. Regionally, the GCC accounted for $24bn of the total: in Mena, Oman and Egypt are among the governments planning to issue sukuk for the first time. Little wonder then that a recent report from Standard & Poors said that sukuk was fast becoming a “mainstream” debt instrument.

Many of the region’s asset managers have been among the trailblazers in this investment space, but others have steered clear. Will the rapid current expansion persuade more conventional fund managers to make the switch to this specialised market?

According to Mark Watts, Head of Fixed Income at National Bank of Abu Dhabi (NBAD), the industry will see a number of managers moving into the Islamic finance space.

“On the conventional side there’s a wealth of market, portfolio and bond-analysis experience and in my mind, it’s easier to train someone in Islamic finance and the specifics of how the Mena bond market trades, than it is to take someone who’s very well versed in Islamic finance and turn them into a portfolio manager or analyst,” said Watts.

“I think there are a lot of people out there, maybe working in London, who would jump at the chance of coming into the region, following their own personal faith and investing in sukuk whereas they may be uncomfortable doing the job on the conventional market.”

Watts warns that investors should be wary of inexperienced managers jumping on the bandwagon – especially ex-traders.

“There are new managers coming to the party. Some of these managers will end up being credible competition and we welcome that, but some of them will be people who are a bit more opportunistic,” he says.

“A trained trader is not the same as a trained fund manager. They approach the market in completely different ways, and that comes out in the risk profile. Our message to investors is always to have a look at the underlying experience, pedigree and resources of the fund manager.”

NBAD has approximately 40% of its $800m AUM invested in sukuk, making it one of the biggest players in the region, according to Watts.

Growing investor understanding

Investors do seem to have an understanding of products such as sukuk and this is one of the key factors behind increased issuance, according to Dilawer Farazi, portfolio manager of the Invest AD Middle East and Africa Bond Fund.

“Many international investors now have a better understanding of what a sukuk is, they understand the structures and appreciate that the structures in effect replicate the cash flows of a conventional bond,” says Farazi.

“There is a broader group of investors now willing to participate in sukuk issuance because of evidence that sukuk tends to have lower volatility characteristics than conventional bonds,” he adds.

Farazi believes this is down to a “dedicated Islamic investor base” that holds approximately 70% of sukuk issuance and tends to adopt a “buy and hold” approach, creating relatively low selling pressure in periods of volatility.

He also adds that a “demand-supply mismatch” ensures that new supplies tend to be mopped up easily and issuers, in most cases, obtain more favourable pricing than would be the case for conventional bonds.

Historically low yields

Yields for sukuk issuance are at historical lows, driven by realistic pricing and investors’ acceptance of longer tenors. The S&P Ratings Direct report (entitled ‘Investor Appetite is Pushing Sukuk Into the Mainstream’) identified the recent $1 billion five-year sukuk of the Dubai Electricity and Water Authority (DEWA) as especially significant, noting that its dollar-denomination and low yield (3% compared to 6% on a previous bond) could “set the benchmark” for other strong credit quality government-related entity (GRE) credits in the region. Banks in Qatar and Saudi Arabia are predicted to lead more quality issuance in 2013, as they respond to increasingly rigid regulatory capital requirements, while the UAE could tap the sukuk market to boost its funding profile.

The outlook for investing in sukuk looks favourable, according to Mohieddine Kronfol, chief investment officer of Global Sukuk and Mena fixed income at Franklin Templeton Investments.

“On the supply side it looks good, and on the fundamentals of the different companies it’s looking good,” says Kronfol. “It’s also looking good with respect to the supply and demand imbalance; the market will continue to be underpinned by solid demand and that’s going to help performance from a risk or volatility perspective.”

The global firm has been making waves in Dubai since 2007 and as of 31 December 2012 manages over $1bn in Shariah-compliant assets. It recently launched the Ucits-compliant Franklin Templeton Global Sukuk Fund, which Kronfol says could allocate between 40 – 50% of its assets to the GCC.

Kronfol stresses that although their latest product launch is a new departure in some ways, Franklin Templeton are not new to the space.

“We‘ve been doing it for a while and we have a leadership position. We have all the attributes to be competitive over the long run and that’s why we’re doing this.”

So, while the trajectory of increased sukuk issuance is set to continue, fund managers who are new to this space will face stiff competition from the heavyweights as they try to get a slice of the pie.

Franklin Templeton launches first UCITS sukuk fund

Global fund manager Franklin Templeton Investments has launched the first-ever UCITS-compliant shariah sub-fund, MENA FM has learned.

The Franklin Templeton Global Sukuk Fund will be available from 25 March 2013 as part of a new Luxembourg-domiciled SICAV range and launches in conjunction with the Templeton Shariah Global Equity Fund and the Templeton Shariah Asia Growth Fund.

It may allocate between 40 and 50% of its assets to fixed and floating rate securities issued by Gulf Co-operation Council (GCC) government, government-related and corporate entities.

Mohieddine Kronfol, chief investment officer of Global Sukuk and MENA fixed income at Franklin Templeton Investments, said: “Islamic investors are seeking greater diversification, and exposure to Sukuk can reduce volatility while adding value to any Shariah-compliant equity or real estate portfolio.”

Kronfol added that the long-term projections for the fund are “substantial given our confidence in the growth of the Islamic fund market and our expectations for the demand over the long run. Obviously we’re optimistic about its success.”

He said: “Although the products are new, we’re certainly not new to the space. We‘ve been doing this for a while and we have a leadership position. There are a lot of positive attributes that this product has and this is why we have a very competitive value proposition.”

As of 31 December 2012, Franklin Templeton manages over $1 billion in Shariah-compliant assets, with dedicated expertise in the United Arab Emirates as well as Singapore, Malaysia and Hong Kong.

Adam Quaife, Senior Director for Central & Eastern Europe and the Middle East, said: “As a global player with an established presence in Dubai, Franklin Templeton recognises the increased demand from investors for solutions that adhere to Islamic investment principles.”

“This event is quite opportune as it comes at a time when a number of markets across the Middle East are taking demonstrable steps towards developing their infrastructure to support the growth of Islamic products,” he added.

All three funds have been reviewed and endorsed by the Amanie International Shariah Supervisory Board, who will provide on-going supervisory and monitoring services.

Egyptian sukuk to tap Islamic investor pool

The introduction of sukuk issuance in Egypt will reinvigorate local fixed income markets by tapping into demand from local and regional investors, industry experts have said.

Last week the Egyptian government approved a draft law that will allow state and corporate bodies to issue sukuk, often referred to as Islamic bonds. President Mohamed Mursi’s administration sees sukuk as one way of easing the pressure on government finances, at a time when its deficit and overall debt is mounting. Corporate sukuk, on the other hand, is seen as a way for Egyptian firms to open a funding stream by attracting wealthy GCC investors.

Egypt’s finance minister Al-Mursi Al-Sayed Hegazy has predicted the state could raise as much as $10 billion via sukuk annually. While some believe this is over-optimistic, the move is expected to tap into a pool of new investors for the country and deepen fixed income markets.

Ziad Chaaban, director of fixed income at EFG-Hermes Asset Management, said that there is a “large and growing” pool of Islamic investors in Egypt who have had no shariah-compliant investment options other than cash deposits or equities. Given the recent volatility in equities, most of this money has therefore been held in cash. 

“The introduction of the Sukuk legislation will solve a two-sided problem,” said Chaaban. “On one hand, it provides local Islamic investors with a viable investment opportunity. With that, we expect the emergence of a new Islamic money market and fixed income industry, the main investable vehicles for retail and corporate investors. On the other hand, it gives the government, with its strained financial position, access to a new pool of assets that has not been available to it before.

“The Sukuk universe globally has a market cap of over USD 240 billion dominated to a large extent by the Malaysian local market. The introduction of Egypt as an issuer in the Islamic space would give a significant boost to the market in size and diversification, and we expect to be largely successful.”

The draft law is expected to take at least three months to be passed, amid concerns over the wording and the extent to which investors will gain rights over public assets. Forthcoming parliamentary elections are also likely to delay the bill’s passage.

Analysts predicted that GCC investors would be wary of the risk of putting money into Egypt but would do so if the yield was adequate.

“Naturally, there will be question marks in the minds of investors, both regional and international, and appetite will depend on how the issuer can address such concerns,” Chavan Bhogaita, head of markets strategy at National Bank of Abu Dhabi, told Reuters. “It all depends on yield. Investors around the world are still looking for yield and are willing to venture outside their comfort zone to get it.”

Falcon Private Bank to launch sukuk fund

Global investment firm Falcon Private Bank intend to launch a fund investing in sukuk (Islamic bonds) next month, it has been reported.

Zafer Khan, Falcon’s chief executive in the MENA region, hopes the fund, which will be offered to the bank’s clients, will reach $500m.

He said that the firm “already has substantial demand from our clients” for global sukuk investments.

Falcon intend to launch the fund next month, subject to the necessary regulatory approval.

Khan added that debt which was shariah-compliant and did not pay or charge interest was set to take off. This sentiment has been echoed by Standard & Poor’s (S&P) who expect that debt issuance by GCC banks, and in particular sukuk, will remain strong this year.

According to S&P’s credit analyst Timucin Engin, “sukuk is becoming a key component of Gulf banks’ funding bases” as well as becoming increasingly important for conventional banks that see the sukuk market as a way of diversifying their portfolios.

Sukuk represented almost 50% of GCC banks’ debt issuance in 2011 and 2012.


Consultation launched on Oman sukuk reforms

Proposals to issue sukuk and other Islamic financial instruments in the Omani banking sector are now in the public consultation stage, according to a statement released by the Capital Market Authority (CMA).

The CMA has recently completed a set of regulatory draft provisions to be considered by the government, licensed companies, law firms, audit firms, academics, professional parties and the public following the announcement last year by the Omani government to introduce Islamic finance.

The draft proposals come at a time of increasing investor demand for these products as banks seek to manage their liquidity. Oman is currently the only country in the Gulf Cooperation Council (GCC) yet to introduce Islamic finance.

According to a survey by Thomson Reuters, global demand for sukuk will increase from $240bn in 2012 to $421bn by 2016. The survey also found that investors were planning to allocate $200m into their portfolios in 2013, equating to 50% of their portfolios, with sukuk representing between 35% to 40% of this.

Real estate firm Tilal Development Company, and a number of other Omani companies and banks, have already announced plans to float the Islamic debt instruments during the coming year.

Mena fixed income ‘to remain strong’ in 2013

Mena debt markets performed strongly and consistently in 2012 and will continue to favour the investor next year, according to Mohieddine Kronfol of Franklin Templeton.

Kronfol, who is Chief Investment Officer (Global Sukuk and Mena Fixed Income) at the firm, said that Mena debt had performed particularly well in the second half of 2012, against the backdrop of problems in the Eurozone and a slowdown in China.

“In 2012, performance of Mena debt markets, particularly the GCC, was strong and consistent throughout the year,” wrote Kronfol in a report to investors. “Returns for GCC debt of 11.62%, measured by the Citi MENA Broad Bond Index GCC, are on track to become the strongest since 2009. Regional debt and sukuk markets have also delivered competitive risk-adjusted returns when compared to global fixed income sovereign and credit indexes, namely the Citi World Government Bond and Barclays Capital Global Aggregate Indexes.

“Fundamental improvements across several GCC debt markets as well as resilience to international market turbulence have positioned the asset class to increasingly benefit from international investor demand and be recognized as an attractive and sustainable investment destination.”

The successful restructuring of Dubai Holding bank debt, and the payment of DIFC and JAFZA sukuk maturities, demonstrated the region’s economic strength and boosted investor confidence, he added.

Looking forward to 2013, oil prices and political risks remain factors to concern investors, but the debt dynamics in the GCC remain the strongest in the world, said Kronfol.

“The outlook for hydrocarbon prices are expected to support expansionary fiscal policies and economic growth,” he concluded. “The risk of assuming contingent liabilities is receding while liquidity is improving. Although bond and sukuk prices have rallied and spreads have compressed over the past few years, Mena/GCC debt continues to offer value and remains under-allocated in global, emerging market and regional portfolios. The supply-demand imbalance will therefore continue to favor investors.”