INTERNATIONAL. Medium-term growth prospects for the world's sukuk market are good, said Standard & Poor's Ratings Services in a report published today.
"We foresee stable growth in issuance of these securities in 2010, after a recovery last year to issuance of US$23.3 billion," said Standard & Poor's credit analyst Mohamed Damak in the report, "The Sukuk Market Is Likely To Show Steady Growth In 2010."
Notable developments in 2009 were:
•Cumulative issuance outstanding topped the symbolic bar of $100 billion.
•Malaysia became the No. 1 issuing country with 54.1% of the value of sukuk issued.
•The dollar made a partial comeback but local currencies were the denomination of choice for sukuk issuance.
•Big new players tapped the market like General Electric Capital Corp. and International Finance Corporation.
•Two sukuk defaulted and one other avoided default with a last-minute support package and repayment.
"The 2010 pipeline remains healthy, in our view, with about $20 billion of sukuk publicly announced in the past that is likely to come to market if conditions permit," said Mr. Damak.
In addition, we understand from unofficial market sources that about US$10 billion more could potentially enter the pipeline. If that comes to market, total sukuk issuance in 2010 could approach the current 2007 record of US$34.3 billion.
The main uncertainty this year is market conditions. The default of two sukuk has raised questions about this relatively young market.
These sukuk were issued by The Investment Dar Co. KSCC (TID) and Saad Group. A third sukuk issued by Nakheel avoided default thanks to a last-minute support package.
"We believe that once investors have a clearer view of the possible outcome of the two recent defaults, the sukuk market is likely to grow more strongly after making some adjustments reflecting lessons learned," said Damak.
Beyond 2010, a major impediment to the emergence of an integrated, global sukuk market remains, in our view, lack of standardization, especially regarding Sharia compliance and the legal environment.
Standard & Poor's provides market participants with independent and objective opinions about the creditworthiness of issuers and issues--including those involving sukuk. We don't comment on the Sharia compliance of a particular issue or issuer.
Our ratings don't constitute a recommendation to sell, buy, or hold a particular security, regardless of whether it is Sharia compliant. Instead, our ratings may assist investors to make decisions and issuers to benchmark our view of their creditworthiness against their peers'.
Standard & Poor's rates 26 sukuk.
We expect Malaysia to continue to lead the global sukuk market in issuance and foresee steady growth in the broader market in Southeast Asia over the next couple of years. Malaysia's well-established Islamic banking system, strong regulatory framework, and government support for Islamic finance enabled the country to take the lead in sukuk issuance in 2009.
We believe the prospects are weaker for Dubai-based issuers and potentially other countries in the Gulf because investors are likely to have a low risk appetite and ask for a higher return to reflect the higher risks that they perceive.