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Asian governments join sukuk rush

sukuk structureHong Kong, Indonesia and Pakistan are banking on pent-up investor demand as they look to raise up to a combined US$3.5bn in the fast-growing Islamic bond market.

The three sovereign sukuk issues, including a planned US$1bn debut from Triple A rated Hong Kong, are set to launch before the end of September.

Few Asian issuers have targeted the global sukuk market in the past, and the glut of deals comes as governments across Asia are looking to attract Islamic investors from outside the region.

“There are a lot of Islamic investors from the Middle East looking for diversification and new investment opportunities,” said Ahsan Ali, Standard Chartered Bank’s managing director and global head for Islamic origination.

“Historically, these investors were mostly investing in Europe and US, but over the past few years, we have seen growing investment allocations to Asia as they move to diversify their assets,” Ali said.

Indonesia, home to the world’s biggest Muslim population, is Asia’s only regular issuer in the global sukuk market, having issued annually since 2010. Pakistan has sold Islamic debt overseas only once before, in 2005, while Malaysia has typically preferred to target its own domestic market.

The addition of more Asian sovereigns to the market comes amid growing interest in the sukuk format among borrowers across the globe. The UK priced its first sukuk this year, while Luxembourg, Tunisia, South Africa are among other governments considering a debut.

“This year has been unique with issues coming from outside the traditional market in the Middle East,” said Mohammed Dawood, HSBC’s global head of sukuk financing. “The UK government sold a £200m (US$336m) bond in June, and other sovereigns are looking at the market.

“This helps to internationalise the product as a mainstream instrument that can be used as an alternative funding source.”

For Islamic investors, the boost in supply cannot come soon enough. Ernst & Young projects the growth of the Islamic banking industry will drive demand for sukuk to US$900bn in 2017, up from US$300bn just over a year ago. Globally, assets held by Islamic investors rose to US$1.8trn at the end of last year, marking an annual growth rate of about 17.6% over the last four years.

Asia’s sovereigns view the upcoming offerings as an opportunity to set benchmarks for companies to follow, as well as a chance to expand their own investor base.

Hong Kong is expected to sell a US$500m-$1bn sukuk in September via joint leads CIMB, HSBC, National Bank of Abu Dhabi and Standard Chartered. Conventional as well as Islamic investors are likely to snap up the debut from a rare Aa1/AAA/AA+ rated issuer.

“If (conventional) investors want access to a certain credit, and if sukuk is the only way they can get hold of the credit, they will definitely buy it,” said a Kuala Lumpur-based debt banker.

Bankers hope Indonesia can beat Hong Kong to market with a US dollar sukuk of up to US$1.5bn in late August, after the end of Eid al-Fitr, the festival marking the end of the Islamic holy month of Ramadan.

Roadshows are planned for the middle of August. Indonesia is rated Baa3/BB+/BBB-. CIMB, Emirates National Bank of Dubai, HSBC and Standard Chartered are joint bookrunners.

Pakistan, with the lowest rating of the three at Caa1/B- from Moody’s and Standard & Poor’s, will appoint lead banks in the coming days, according to a finance ministry official.


While Asia is home to the world’s biggest Islamic bond market, in Malaysia, Asian issuers have traditionally had a low profile overseas. The only global offering this year was a US$$300m 2.874% five-year deal from the Export-Import Bank of Malaysia, while last year there were only two in US dollars – an US$800m dual-tranche from Malaysia’s Sime Darby and a US$1.5bn issue from the Republic of Indonesia.

Other Asian borrowers have taken note of Malaysia Exim’s result, however. The bond priced inside its conventional US dollar curve, showing that the Islamic market can deliver cheaper funding. Some issuers in the Gulf region have sold sukuk in global markets at yields 10bp-20bp lower than their conventional bonds.

Sukuk issues are also performing well. The Dow Jones Sukuk Index is up 4.39% so far this year compared with a return of 0.22% in 2013.

Market participants hope high-profile offerings from key Asian sovereigns will allow other borrowers to benefit.

Hong Kong, in particular, is looking to promote itself as a regional hub for Islamic financing to capitalise on growing trade links between Greater China and the Middle East. Trade between China and the Middle East reached US$238.9bn in 2013, up from US$25.5bn in 2004. Malaysia’s Khazanah Nasional and Axiata have already sold sukuk denominated in offshore renminbi in Hong Kong’s Dim Sum market.

“For Hong Kong to pass the sukuk-related ordinance (in March) is a positive development to the overall Islamic financial market,” said Michele Leung, associate director, fixed income indices, S&P Dow Jones Indices.-Reuters