Sovereign long-term sukuk issuance to grow modestly in 2020 – Moody’s

Covered bond downgrade rates lower than issuer downgrade rates

SINGAPORE, March 28: Global sovereign longterm sukuk issuance will grow modestly this year, continuing the expansionary trend of the past few years, Moody’s Investors Service said in a report published this week.

Larger issuers are driving growth in overall volumes, even as some smaller issuers have not sought to refinance maturing repayments, leading to greater market concentration.

“Sovereign long-term sukuk issuance will rise to nearly $75 billion this year from $71 billion in 2019,” said Christian de Guzman, a Moody’s Senior and the report’s co-author. “We expect that wider fiscal deficits, larger scheduled repayments and a deepening of domestic Islamic financial markets will lead to higher sukuk issuance over the coming years.”

Issuance in 2020 would likely surpass our forecasts should oil prices and demand be durably dampened as a consequence of the coronavirus outbreak, leading to higher deficits and financing requirements among hydrocarbon exporting issuers, including those in the Gulf Cooperation Council (GCC) and Southeast Asia.

The relationship between fiscal deficits and net sukuk issuance among regular sukuk issuers has become more robust, while recent regulation also foreshadows the entry of new issuers, and reflects the wider acceptance of and demand for sovereign sukuk.

The integration of environmental, social and governance (ESG) considerations into investment mandates is likely to be a factor driving the development of green sukuk offerings.

Also:

SINGAPORE: The performance of covered bonds was steady overall during and after the financial crisis and no covered bond defaulted between 1997 and 2019, even though 33 covered bond issuers defaulted, Moody’s Investors Service said in a report published today.

“Covered bond downgrade rates are lower than covered bond issuer downgrade rates,” said Sarah

Huang, Assistant Vice-President Analyst at Moody’s. “Also, there has been a high correlation between the downgrade of a covered bond and the downgrade of its issuing bank.”

For 2019, the 12-month downgrade rate was 5.8% for issuers compared with 2.2% for covered bonds. The average 12-month downgrade rate from 1997-2019 was 18% for issuers and 11% for covered bonds. From 1997-2019, 67% of covered bond deal downgrades occurred less than one month after a corresponding issuer downgrade.

In 2019, there were 12 new covered bond deals. Issuance of covered bond deals peaked in 2008 with 61 that year. Aside from that peak, around 20-30 deals were issued in each year from 2009 to 2013, and issuance then averaged around 10 deals a year between 2014 and 2019.