Sukuk Fait Accompli and Foresight in the Time of Coronavirus


Thursday, April 16, 2020 /07:30 PM / by Fitch ratings / Header Image Credit: Global Ethical Banking

After witnessing strong market activity during the first two months of 2020, the coronavirus pandemic has put new international sukuk issuance almost at a standstill in March, Fitch Ratings says. The pandemic has triggered major uncertainties in markets and many jurisdictions are facing an unprecedented combination of challenges, including health issues, reduced oil revenues, economic disruption, severe financial market dislocation and changes in liquidity and investor sentiment.

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While major uncertainties remain, once the financial landscape has settled and issuers and investors have readjusted, new sukuk issuances are expected to rise, led by high-rated sovereigns funding budget deficits, followed by financial institutions and corporates.

Borrowing needs and fiscal deficits are set to expand in sukuk-issuing countries, like the Gulf Cooperation Council (GCC) countries and Malaysia, which are net oil exporters, due to the oil price fall and the large economic stimulus packages launched to mitigate the coronavirus's fallout. We forecast oil prices to average USD35/bbl (Brent) in 2020 due to oversupply. While sukuk issuers like Indonesia could benefit from lower oil prices as they are net oil importers, the negative effects of lower commodity export prices and reduced tourism revenues will lead to budgetary pressures. The risks to Turkey come mainly from deterioration in global financial conditions. Banks face increased risks to their credit profiles.

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Jurisdictions like Saudi Arabia, which raised SR15 billion in March 2020, have the benefit of their ability to issue local-currency sukuk due to their established domestic debt markets, in contrast to most other GCC jurisdictions which lack local market depth.

Sukuk issuance with a maturity of more than 18 months from the Gulf Cooperation Council (GCC) region, Malaysia, Indonesia, Turkey and Pakistan rose by 6% in 2019. The volume of outstanding Fitch-rated sukuk reached USD105 billion at the end of the last quarter of 2019, of which about 32% is estimated to mature in 2020-2022. The issues remain concentrated in Saudi Arabia (38.5%), UAE (16.2%), Indonesia (14.3%) and Malaysia (10.7%). About 83% of issues are investment grade and 17% are speculative grade.

Furthermore, the planned shift from LIBOR to the Secured Overnight Financing Rate (SOFR) in the US dollar market by end-2021 is relevant to the global sukuk market as dollar-denominated sukuk constitutes over three quarters of all outstanding sukuk. But of these, more than 90% are fixed rate and so are unaffected by the planned transition.

Fitch Ratings' approach to rating originator-backed ("asset-based") sukuk issues means anchoring the rating to that of the originator, as with a conventional bond issue. For senior unsecured obligations, ratings would typically be in line with the originator's Issuer Default Rating (IDR).

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