JEDDAH – Qatar's imminent sukuk issuance of roughly $3 billion will kick-start what may be a record year for the Shariah-compliant debt market, Fitch Ratings said. Regional growth and robust government spending are likely to be partially funded through sukuk programs in established Gulf Cooperation Council sukuk markets. At the same time, strong investor demand is likely to attract debut issues from Islamic and non-Islamic states in 2014. The push by sovereigns in the region to be become an Islamic finance hub is also likely to spur sukuk issuance. “We estimate that issuance dropped around 12 percent to $120 billion in 2013 due in part to market jitters over US bond purchase tapering. However, demand remains strong and we expect this decline to be a blip in the longer-term trend of steady growth, with 2014 issuance likely to be at least in line with 2012's record of $137 billion,” Fitch Ratings said. Several first-time issuers are likely to enter the market in 2014 including the UK, which plans to debut a GBP200 million sukuk this year. Luxembourg and Hong Kong have also recently taken steps to introduce new legislation that would allow the issuance of sukuk. Sovereign and sovereign-linked issuers will remain the dominant source of supply, but 2014 could also see more issues from corporates and non-sovereign entities, such as Atlanticlux Lebensversicherung's $100 million insurance-linked sukuk that Fitch rated ‘BBB-' in October. Although all these issues would be relatively small, they will be a significant step in broadening the range of debt available to investors. Sub-Saharan African sovereigns have also been considering issuance for some time. As well as the strong demand from investors who will only buy sharia-compliant securities, issuers are likely to be attracted by evidence of increasing market efficiency. Structuring costs have fallen significantly and the time taken to put together a deal has fallen from as much as six months to a few weeks. Supply and demand imbalances have sometimes led to pricing for sukuk being lower than for bonds, but we believe any difference is likely to disappear in the medium term as these imbalances lessen. There are still challenges that will limit the attraction of sukuk to many investors and the development of a liquid secondary market. In particular these include the lack of a standardized deal structure and the lack of legal precedent over investors' ability to enforce their rights in many jurisdictions. Despite demand for the product, growth of sukuk is still directly linked to global issuance sentiment and issuance growth in general. Still, growth and significant spending commitments will help boost issuance in established sukuk markets. Saudi Arabia and Abu Dhabi's spending plans, Dubai's preparations for the 2020 World Expo and Qatar's plans for the 2022 FIFA World Cup are all likely to boost sukuk issuance either directly by the sovereign or by related entities. Oman, which has not been a major issuer, has also indicated it will use sukuk to fund infrastructure projects in the next few years. — SG
