A first as Dubai bank prices $600m sukuk for US firm

Nasdaq Dubai

• Global outstanding sukuk market reached $765bn in 2022
• Volumes expected to fall to $150bn this year
• Three UAE banks have issued $1.7bn worth of sukuk so far this year

Emirates NBD, Dubai’s largest bank, has successfully priced a $600 million sukuk for New York-listed Air Lease Corporation.

It marks the first sukuk issued by a US corporation.

A sukuk is a Sharia-compliant financial certificate, similar to a bond in Western finance but that complies with Islamic religious law.

The five-year sukuk saw robust demand, attracting orders of over $2.2 billion, building on ALC’s previous activity in the bond market, where it raised over $20 billion.

Mohammad Al Bastaki, CEO of Emirates NBD Capital, said that he expects the milestone to incentivise other non-regional issuers to consider sukuk financing.

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But according to analysts, the volume of global sukuk issuance is likely to decrease this year.

It will remain a key funding source, although a reduced one, in core Islamic finance markets including the GCC, Malaysia, Indonesia, Turkey and Pakistan. 

Despite expectations of a slowdown, three UAE-based banks – First Abu Dhabi Bank, Dubai Islamic Bank and Emirates Islamic – have already issued sukuk this year totalling more than $1.7 billion.

S&P Global Ratings said it believes that sukuk volumes will continue declining this year to total about $150 billion, compared to $155.8 billion in 2022.

“We expect lower and more expensive global liquidity, increased complexity, and reduced financing needs for issuers in some core Islamic finance countries to deter the market,” said S&P Global Ratings credit analyst Mohamed Damak.

“However, we see supportive factors in other areas. Corporates are likely to contribute to issuance volumes, particularly in countries with government transformation plans, such as Saudi Arabia, where well-capitalised banking systems will not have the capacity to finance all the projects.”

Damak added: “We also see continued momentum via the energy transition and increased awareness of environmental, social and governance considerations among issuers in key Islamic finance countries.”

Fitch Ratings echoed these sentiments, noting the medium to long-term outlook remains positive amid intact Islamic investor demand, issuer refinancing needs and government support in core markets. 

The global outstanding sukuk market reached $765 billion in 2022, the agency added. By comparison, the size of the conventional bond market was estimated to be $119 trillion in 2021, according to the Securities Industry and Financial Markets Association.

“High oil prices have buoyed the fiscal profile of oil-exporting sovereigns like the GCC and Malaysia with lower funding needs,” Bashar Al-Natoor, global head of Islamic finance at Fitch, said. 

“However, their drive to diversify funding sources can propel sukuk growth.

“On the other hand, funding gaps will remain for oil importers like Indonesia, Turkey and Pakistan, which sukuk could help plug.” 

Al-Natoor said sukuk continues to face hurdles like higher issuance costs, time-to-market and complexity compared with bonds and bank loans, and standardisation gaps.

Dubai-based Dino Kronfol, chief investment officer of global sukuk at Franklin Templeton Investments, said fixed income faced a challenging 2022 but said this year “looks more promising” for sukuk and GCC fixed income. 

“For fixed income, 2022 was one for the record books,” Kronfol said. “Interest rates rose more than most predicted, and inflation continued its decade-long ability to surprise forecasters. 

“Spreads also rose across the board, with few exceptions, and the US dollar was strong against developed and emerging market currencies, leaving little room to avoid financial market pain.

“Bonds in the GCC countries, as well as global sukuk markets, did an admirable job relieving much of that pain.”

Kronfol added that GCC governments are expected to see $199.3 billion in fixed income maturities over the next five years, with corporate maturities at $169.1 billion, for a total of $368.4 billion. 

Saudi Arabia is expected to see the most, worth $125 billion, followed by UAE and Qatari issuers at $109.8 billion and $73.1 billion, respectively. 

“After every sharp drawdown in fixed income, there have been strong recoveries,” Kronfol said.

“Though one must be careful not to discount the adjustment that bond markets have just lived through, we believe high-quality bonds have the potential to deliver the best risk-adjusted returns.”