Sukuk issuances to rise in 2H20 amid low interest-rate environment

Issuers are taking the opportunity to raise corporate bonds or sukuk to refinance debt and lower effective borrowing costs, says analyst


SUKUK issuances are set to rise in the second half of 2020 (2H20), as corporate issuers take advantage of the low interest-rate environment in Malaysia, the world’s biggest market for Islamic bonds.

This comes after a somewhat sluggish 1H for both conventional and Islamic bond issuances, likely due to the Covid-19 pandemic and the resulting containment measures taken which saw economies worldwide ground to a halt.

iFAST Capital Sdn Bhd fixed-income analyst Ganageaswaran Arumugam said issuers are taking the opportunity to raise corporate bonds/sukuk to refinance their existing debt and lower their effective borrowing costs, considering that the Overnight Policy Rate is now at an all-time low.

“Year-to-date up to July 31, 2020, total sukuk issuance in Malaysia amounted to RM34 billion, down 53% from the same period last year, much of which was due to the Covid-19 pandemic,” he told The Malaysian Reserve.

On July 7, Bank Negara Malaysia (BNM) reduced the benchmark lending rate for the fourth time this year by 25 basis points (bps) to 1.75% due to concerns over weak economic conditions caused by the pandemic.

According to data from Malaysian Rating Corp Bhd, total gross issuance of corporate bonds as at 1H20 stood at RM38.9 billion, down 50% from a year ago and the lowest 1H total since 2016.

The Securities Commission Malaysia is expecting up to RM100 billion worth of corporate bonds and sukuk issuance this year, based on industry feedback amid the pandemic.

Over the past three years, sukuk accounted for an average of 70% of corporate issuances.

While measures from BNM such as lowering interest rates and banks’ statutory reserve ratio have helped bond issuance volume, Ganageaswaran believes volumes are unlikely to return to pre-pandemic levels anytime soon.

“Thus, we are pessimistic the total corporate bond issuance in Malaysia would reach RM100 billion by the end of the year,” he said.

According to Moody’s Investors Service Inc, global sukuk issuance is set to fall 5% this year to about US$170 billion (RM712.5 billion) due to the Covid-19 crisis, after four years of rapid growth.

Moody’s VP and senior credit officer Nitish Bhojnagarwala said the decline will be partly limited by the financing needs of Gulf Cooperation Council countries due to lower oil prices and the pandemic.

“We expect issuance will rally in 2H20 to around US$90 billion (RM376.88 billion), led by sovereigns in the Gulf.

“Despite the decline, 2020 will still see the second-highest sukuk issuance total ever, following a 36% increase in 2019,” Nitish said in a statement last week.

Volumes are likely to rebound in 2H20, as governments raise money to finance their responses to the coronavirus crisis.

Persistently low oil prices could also increase deficits and financing needs among oil-exporting issuers, primarily in the Gulf countries.

“We expect some African sovereigns and corporates to enter the market, following the lead of Egypt and Nigeria earlier this year.

“Though the green sukuk market is in its infancy, issuance is likely to accelerate as efforts to combat climate change gain traction,” Nitish added.

Total issuance in the first six months of 2020 dropped to US$77 billion, down 12% from the same period last year, as activities in Malaysia and Indonesia flagged.

Moody’s said issuance in South-East Asia fell 25%, while volumes in the Middle East rose 7%.

According to a Moody’s report titled “Cross-sector — Islamic Finance”, issuances from Malaysian entities fell 9% to US$32.8 billion in 1H20.

Yet, Malaysia remained the world’s leading issuer, with a 42% share of the total in 1H20, versus a 41% share during the same period last year.

“The lower 1H volume reflected a roughly 42% fall in corporate issuances over the six months.

“Malaysia’s leadership in terms of issuance was maintained due to short-term issuances by corporates, financial institutions and sovereign, particularly in local currency,” the report read.