UAE sukuk standards slow issuance, distort prices, investors say

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DUBAI — The adoption by the United Arab Emirates of sure sharia-compliance requirements has slowed the issuance of Islamic bonds from the Gulf, including to a continual supply-demand imbalance, market sources mentioned.

Dubai, one of many UAE’s seven emirates, has lengthy aimed to ascertain itself as a significant international middle for issuance of sukuk, or Islamic bonds, that represent the spine of the $2.2 trillion international Islamic finance business. UAE buyers are additionally key gamers within the international sukuk market.

However compliance requirements adopted by UAE central financial institution physique the Larger Sharia Authority, and confusion round them, are stopping native banks from shopping for some sukuk, prompting buyers to request clearer guidelines because the UAE’s stream of recent issuance ebbs, market sources mentioned.

“The market goes by means of a teething interval because it seeks readability on learn how to discover methods to adjust to the rules,” mentioned Bashar Al Natoor, international head of Islamic finance at Fitch Rankings.

The Larger Sharia Authority (HSA) adopted the sharia requirements of the Bahrain-based Accounting and Auditing Group for Islamic Monetary Establishments (AAOIFI), the standard-setting physique for the Islamic monetary business, in 2018. Nevertheless, issuance applications created previous to that have been exempt from the brand new guidelines, sources mentioned, that means the impact has taken a while to develop into obvious.

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Traders additionally mentioned disagreement amongst students at UAE establishments over whether or not Saudi Arabia’s Nationwide Business Financial institution’s AT1 sukuk issuance in January was AAOIFI-compliant, and thus adhered to HSA rules, had rattled potential consumers.

A key difficulty is round AAOIFI necessities for sure debt devices’ “tangibility ratio,” which pertains to the belongings that should be used as collateral for sukuk to stay sharia-compliant till maturity.

“All that is inflicting a logjam in issuance and for my part is turning into an existential menace to the long-term viability of the market,” Abdul Kadir Hussain, head of fastened earnings asset administration at Arqaam Capital, wrote in a observe.

“Standardization stays an elusive dream,” he added.

Greenback sukuk issuance from the UAE to date this 12 months totals simply $1 billion, in contrast with $6.35 billion by means of all of 2020 and $7.9 billion in 2019, in keeping with Refinitiv information.

Regardless of expectations of an acceleration in international issuance in 2021, there was lower than $2 billion in laborious forex sukuk offered within the first quarter of this 12 months, versus $7 billion in the identical interval of 2020, in keeping with Hussain.

This has led to sukuk danger being mispriced, he and others mentioned, as Islamic buyers scramble for the few points on provide, particularly AAOIFI-compliant ones.

In March, Arabian Centres offered $650 million in sukuk at 5.625% in a non-compliant deal and drew simply $1.35 billion in demand, whereas Bahrain’s Nationwide Oil and Fuel Holding Firm (NOGA Holding), which has a decrease credit score rating, raised $600 million in eight-year sukuk. These sukuk, which conform to AAOIFI requirements, have been offered at 5.25% and attracted greater than $2 billion in orders.

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The HSA has been holding discussions with buyers to deal with standardization points this 12 months, two market sources mentioned.

The central financial institution didn’t reply to requests for remark.

TANGIBILITY

Sukuk, which search to duplicate standard bonds with out the usage of curiosity funds, may be advanced and time-consuming to construction, and tough for buyers to know.

AAOIFI’s requirements in some constructions require the tangibility ratio to be 51% all through the sukuk’s tenor, that means belongings value greater than half the issuance worth are used as collateral.

Traders say this limits the flexibility of issuers to leverage up, making it extra doubtless for them to difficulty standard bonds, and additional dent sukuk provide.

S&P analyst Mohamed Damak mentioned if an asset doesn’t carry out as anticipated it could hit the sukuk’s tangibility ratio.

“Due to that the sukuk needs to be accelerated – and (if) the company doesn’t have the money on its stability sheet to pay it again – then it’s a danger for the buyers,” he mentioned.

“So because of this it’s inflicting just a little little bit of a headache for issuers within the UAE.” (Reporting by Yousef Saba and Davide Barbuscia; Enhancing by Kirsten Donovan)