Regional corporates send out sukuk-ready signals
In the world of capital markets, being ready to issue sukuk or debt capital market instrument is one sign of corporate maturity. It indicates that the company has come of age and carries enough weight and value in the marketplace to reach out to a wide investor base.
Several organisations in the GCC have reached a maturity level where they can access the conventional bond and sukuk markets.
Being ready to issue sukuk — with the attendant stringent benchmarking and vetting that the process entails — usually indicates the company’s ability to access the next level of financial maturity, evolving from being bank funded to more capital market funded, wider sources of growth financing. It’s all a part of corporate maturity.
At the same time, improved market appetite and knowledge related to debt issues from the Middle East is an opportunity for mature companies to access a wider pool of sophisticated global investors from North America to the Far East, along with the best practice that this financial diversity brings.
Major corporations from the UAE, for instance, have already taken advantage of this diversity of investors by issuing Islamic bonds. These include Emaar Properties, Majid Al Futtaim Group, DP World, Emirates Islamic Bank, Dubai Islamic Bank, Sharjah Islamic Bank and Investment Corporation of Dubai, among others.
Next steps
Once a company has gone through the paces and conquered the hesitation of the first step, the next ones are always easier and more natural.
Companies that opt for the Islamic bonds route today have an advantage because there is a steady and growing appetite for these instruments as structures become more globally acceptable.
The market for sukuk issuers includes traditional investors as well, which is the reason you see sovereign issuers such as Hong Kong issue a second sukuk.
Such is the appeal of sukuk today that everyone wants the product. Unfortunately, issuance is not as robust or as frequent as the appetite for it warrants, forcing investors to hold on to the paper they already own, often because their investment profile demands a certain percentage of debt or Islamic debt in their portfolio. If issuance increases dramatically, trading volumes would standardised and follow, adding depth to the secondary market. This in turn would encourage more issuance, resulting in a virtuous cycle of growth.
Another phenomenon with the power to spark such a virtuous cycle is index-linked products, which are especially valuable for institutional fund managers.
With credible sukuk benchmarks such as the Emirates NBD Markit iBoxx USD Sukuk Index now available as analytical tools, we can expect to see more index-linked and exchange-traded instruments coming to market.
We have seen in the past that markets move to index-linked products as they mature and deepen. Obviously, the first requisite is a credible and inclusive index.
This progression — as issuance-shy companies become more confident and investors make higher allocations to Islamic product — is a golden opportunity for mature regional corporations to optimise their debt structures. A broad, active and stable debt capital market provides the accessibility.
Ahmed Al Qassim, Chief Executive Officer of Emirates NBD Capital