Islamic investors offer borrowers with sukuk ability better pricing

Throughout 2023, syndicate bankers have extolled the strength of the sukuk market, driven by local Islamic banks sitting on lots of cash because of sky-high energy prices over the past two years.

The average subscription ratio for a sukuk issue from a borrower from the MENA region has outstripped that on their conventional bonds in 2023 across all three main issuer groups – sovereigns, corporates and banks (see graph). The data for sovereigns does include issues from outside MENA: one sukuk from Turkey and one from Turkish lender Ziraat Katilim Bankasi.

Sovereign benchmark sukuk were 4.8 times oversubscribed on average, according to data from GlobalCapital’s Primary Market Monitor, versus 3.8 times for conventional bonds.

For financial issuers, sukuk drew a subscription on average of 4.4 times, compared with 2.7 for conventional bonds.

The difference between sukuk and conventional bond oversubscription was smaller for corporate issuers. Much of that was a result of a trade from Saudi Arabia’s sovereign wealth fund, Public Investment Fund, that drew a $31.8bn book for a $5.5bn conventional deal.

Corporate sukuk were on average six times oversubscribed, versus 5.8 times for their regular benchmark bonds. The greater book sizes for corporate sukuk and bond issues versus sovereigns or banks may be down to supply. Corporate issuance from CEEMEA, not just the Gulf, has been very low in the past two years. The few MENA corporates to have issued have often been best-in-class issuers.

It is not the case that sukuk books are bigger because the sellers are better rated issuers, however. Many of 2023’s sukuk have been issued by sub-investment grade real estate firms, for example.

Bahrain, a B+/B+ rated sovereign, achieved a higher subscription ratio for its sukuk, of just under seven times, than Saudi Arabia, one of the leading Gulf sovereign issuers, did, at 4.5 times.

Some issuers have sold sukuk and conventional bonds this year and drawn bigger books for their sukuk. Bahrain is an example – the sukuk tranche was nearly seven times subscribed but a conventional bond sold the same day was just under three times subscribed.

Bigger books mean tighter pricing – usually, the issuer of a sukuk can price it through where it might have sold a conventional bond.

Sovereign sukuk concessions have been in the low single digits this year. For conventional bonds they have been higher. Saudi Arabia, for example, offered 15bp for a $7bn conventional triple trancher but for sukuk it paid 0bp-5bp.

Islamic investors in the Gulf region — mostly the Islamic banks — had a lot of cash to invest because of high energy prices over the past 18 months, which has filtered down into the banking system.

But sukuk issuance has not been high in the past few years, so those buyers restricted to investing in Islamic securities have not been able to be picky. They also compete with conventional investors trying to buy the product.

This bumper demand for sukuk is unlikely to change in the near term. Islamic banks in the region are still awash with cash, while issuance is unlikely to rise by enough to satisfy their demand.

“There is a supply and demand imbalance, and that has been there for a long time,” says Bashar Al-Natoor, head of Islamic finance at Fitch. “We expect this imbalance to stay in the medium term, and by that we mean three to five years.”