Global sukuk drive to sustain in 2021 despite challenges: Fitch

KUALA LUMPUR: Sukuk issuance momentum is expected to continue for the rest of the year, supported by intact investor appetite for sukuk and as issuers seek to diversify funding and to meet upcoming maturities, Fitch Ratings said. 

Although higher oil prices, less pandemic-related support, and the economic recovery could result in lower sovereign funding needs, one-off or infrequent sukuk issuance was expected to support 2021 volumes, the rating agency added.

"The sukuk market is also affected by emerging market and global trends, including the impact of rising US treasury yields on fixed-income markets," Fitch said 

Total global outstanding sukuk reached US$715.2 billion in the first quarter (Q1) of 2021, three per cent higher than in the fourth quarter of last year. 

Issuance with a maturity of more than 18 months from the GCC region, Malaysia, Indonesia, Turkey and Pakistan reached US$9.9 billion in Q1, similar to levels in Q4 2020.

The volume of Fitch-rated sukuk reached US$119.1 billion at end Q1 this year, with 80.7 per cent being investment-grade and the rest speculative-grade.

Fitch said the sukuk market had gone through a transition period in Q1 as issuers, investors, and arrangers sought clarity regarding the recent regulatory changes in the UAE.

The firm said it had started to observe additional dissolution triggers in new international sukuk documentation, including tangibility and delisting events, and new put options. 

"Such triggers may affect the liquidity, credit profile and ratings of mainly non-sovereign issuers. As the UAE is a key sukuk hub, the changes briefly slowed down issuance locally and internationally."

In Q1, sukuk pricing compared to that of bonds continued normalising to pre-2020 levels. 

Fitch looked at 30 sukuk and comparable bonds from 10 issuers from the GCC region, Malaysia, Indonesia and Turkey. 

During normal market conditions, their prices are strongly correlated. 

In the three years to 5 March 2020, the average spreads between them were low at -11bp. 

Between March and June 2020, however, sukuk were sold at steeper discounts than bonds, Fitch noted.

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