Trowers & Hamlins

The issuance of corporate sukuk in the Gulf has increased more than twenty-fold over the last five years, from just US $964 million in 2002/03.

The value of Islamic bonds issued in the Gulf over the past year was almost a third greater (30%) than the amount of conventional paper debt, which rose marginally to US $11.2 billion in 2007/08 from US $11.1 billion.

Amount raised by Islamic and conventional bonds in the GCC

(Year from July 1 to June 30, excludes sovereign debt)

According to Trowers & Hamlins, Western institutions have emerged as the majority purchasers of Islamic debt, now accounting for around 60% of take up.

Neale Downes, Partner, Trowers & Hamlins, comments: “Appetite for Islamic debt has been remarkably resilient to the credit crunch and shows just how low-risk investing in Gulf corporates is now seen by Western institutions.”

“Fears that Islamic bonds would be under-subscribed as yields from US corporate bonds increased have proved premature. Islamic bonds are linked to the underlying value of assets, so the demand for these instruments, often in preference to US securities, is a good sign of how much growth is still expected to come from the Middle East.”

He adds: “A few banks in the region have taken sub-prime write downs, but there is so much liquidity in the Gulf with the high price of oil, that recapitalising these institutions has not been a major challenge. Inevitably, a lot of this oil money is being used to buy Islamic debt.”

Trowers & Hamlins says that doubts voiced over the compatibility of some Islamic bonds with Sharia law and the impact that would have on Gulf investors readiness to invest have largely been put to rest.

Neale Downes says: “Pragmatism guides the vast majority of Gulf investors. Their primary motivation for buying Islamic bonds is the attractive return, the same as Western investors.”   

The research by Trowers & Hamlins shows that the average tenor (time to maturity) of sukuk issued between July 1 2007 and June 30 2008 was 7.4 years, up from six years in 06/07 and 4.8 years in 05/06.

Neale Downes says: “Gulf corporates are all too aware of how the sub-prime crisis left a lot of short-term borrowers in the West with burnt fingers. Longer term debt is more expensive but it is an essential part of a sensible corporate financing strategy.”

The data from Trowers & Hamlins also reveals that sukuk issuance by industry sector is increasingly diverse and is much less dominated by real estate as in previous years.

Just 37.5% of Islamic bonds issued are by corporate entities in the real estate sector, compared to 60% last year. The number of sukuk issued by the oil & gas sector has doubled to 12.5% and 25% of all sukuk are now issued by financial services companies.

Neale Downes says: “It’s a useful barometer for how Gulf economies are diversifying. Real estate is still a hugely important wealth generator in the Gulf, but over the last few years areas like financial services have become increasingly significant contributors to economic growth.”

Islamic bonds issued by sector July 2007 – June 2008

* The Gulf as defined by membership of the Gulf Cooperation Council (GCC). GCC members are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates.