July 14, 2021 / 06:42 PM / By Fitch Ratings / Header Image Credit: Kapital Afrik
Sukuk supply is expected to rise in the second half of 2021 after it showed strong growth during 2Q21, supported by strong investor appetite and issuers' refinancing and funding diversification needs, Fitch Ratings says. Seasonal patterns will affect quarterly sukuk issuance which, following the summer break, is expected to pick up in the remainder of 2021 and beyond.
The sukuk market experienced strong market activity in 2Q21 after a slower 1Q21, driven by big-ticket issuance from the Saudi Arabian Oil Company (the largest corporate sukuk issued to date) and the Indonesian, Turkish and Omani sovereigns. The growth was driven by issuers aiming to diversify their funding and taking advantage of the low interest-rate environment amid continued fiscal deficits and still-challenging economic conditions. Investor demand remains intact due to new sukuk supply scarcity and the global hunt for yield.
Global outstanding sukuk reached USD754.1 billion in 2Q21 (5% higher than 1Q21). Sukuk issuance with maturities of more than 18 months from the Gulf Cooperation Council region, Malaysia, Indonesia, Turkey and Pakistan rose by 136% qoq to reach USD23.4 billion in 2Q21, with sukuk share in the total funding mix jumping to 36% (1Q21: 15%). The volume of outstanding Fitch-rated sukuk reached USD131 billion, with 80% of issues being investment-grade.
Defaulted sukuk volumes remain small at 0.27% of gross sukuk issued to date, and include the 2021 sukuk default by PT Garuda Indonesia (unrated by Fitch). Legal precedents for effective enforcement are lacking in many sukuk-issuing jurisdictions. More sukuk defaults could emerge due to the economic volatility caused by the coronavirus pandemic and once governments withdraw their financial support.
A number of recent international sukuk issuances contained new clauses and revised terms in the documents to comply with the sharia standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). The changes aim to address the globally sizeable UAE-based sukuk investors, issuers and arrangers that are subject to AAOIFI compliance rules. These changes have credit implications that could affect issuers' liquidity, credit profile and ratings. Further changes may be made in the future to comply with AAOIFI standards, which Fitch will assess.