The global sukuk market demonstrated its resiliency in 2020 amid the Covid-19 pandemic as issuers and borrowers continued to take advantage of this pool of liquidity under the prevailing low interest rate environment to raise their funding requirements. According to estimates by Malaysia International Islamic Financial Centre (MIFC), the total global sukuk issuance amounted to US$174.2 billion during the year, representing an increase of 10.4% from US$157.8 billion in 2019.

Corporates and financial institutions in key Islamic finance markets continued to underpin the sukuk volume, with regulatory changes due to the Basel III initiative driving a number of tier 1 and tier 2 offerings from Islamic banks, particularly from the Gulf Cooperation Council (GCC) region. The sovereigns also accessed the sukuk market – sometimes in tandem with conventional bond – to help plug their fiscal deficit.

The sukuk market continued to embrace the sustainable financing initiatives of the various issuers and borrowers as noted by the board of editors at The Asset as they evaluated several issuances of sustainability SRI sukuk and green sukuk for The Triple A Islamic Finance Awards 2021. This comes as the market churned out more innovation in 2020, which contributed to the further development of the Islamic finance industry.

One of the innovative deals that stood out during the review period was the first-ever transition sukuk and the first-ever sustainability-linked sukuk for Etihad Airways amounting to US$600 million. Voted as the Islamic deal of the year, this was a remarkable feat from the aviation industry considering how the airline companies were heavily impacted by Covid-19, yet the United Arab Emirates’ second flag carrier defied the challenging economic environment to access the sukuk market with a new structure. Etihad is committed to minimizing the environmental impact of its operations. It has reduced the use of plastic on all of its flights and is taking positive steps towards becoming a much more sustainable airline. The sukuk was priced concurrently along with a highly structured tender offer of the company’s outstanding US$1.5 billion certificates due 2021.

In response to the pandemic, the Government of Malaysia issued in September 2020 an innovative first-of-its kind sukuk Prihatin, an avenue to rally Malaysians to support the country’s economic recovery efforts. The deal is selected as the Best SRI sukuk – Sovereign, and uniquely structured with national solidarity as the main theme. Sukuk Prihatin is part of the government’s National Economic Recovery Plan initiative, which raised 666 million ringgit (US$157.82 million), up from the initial amount of 500 million ringgit, with the proceeds earmarked for economic stimulus packages and recovery plan post-Covid.

Lowest coupon

Another sukuk related to Covid-19 response was arranged for the Islamic Development Bank (IsDB) amounting to US$1.5 billion, which is honoured as the Best SRI sukuk – Supranational. The offering was designed to address the economic and social challenges caused by the coronavirus in IsDB member-countries.

The transaction was well-received by investors and achieved all of the issuer’s pricing objectives with the final profit rate being the lowest coupon ever printed by IsDB on a US dollar public issuance.

The sukuk market continued to demonstrate the proliferation of green financing with the Republic of Indonesia (RoI) once again adding a green sukuk tranche in its fund raising in June 2020. The sovereign raised a total of US$2.5 billion, including a five-year green sukuk amounting to US$750 million, which is selected as the Best green sukuk - Sovereign. This was the third global green sukuk by RoI since 2018, demonstrating its commitment and contribution to sustainable financing.

Another winning green sukuk – this time among the corporates – was arranged for Saudi Electricity Company amounting to US$1.3 billion. The dual-tranche deal was the first-ever US dollar-denominated green sukuk printed by a Saudi corporate and the transaction was the largest corporate offering from Saudi Arabia in 2020. The final pricing was 30bp inside the initial price thought for both tranches as the combined final order book amounted to US$4.7 billion, after peaking at US$5.4 billion.

Malaysia’s national mortgage corporation, Cagamas, once again distinguished itself during the review period with the country’s first Asean sustainability SRI sukuk for affordable housing amounting to 100 million ringgit. Launched together with a 350 million ringgit Islamic medium-term notes, the issuances, conducted through a public book-building exercise, attracted a strong investor demand, with the total order book of close to 2 billion ringgit at the initial price guidance.

In another winning deal from Malaysia, the Best Asean sustainability SRI sukuk – Corporate is awarded to Sime Darby Property, which priced an 800 million ringgit sukuk that included a 150 million ringgit tranche that represented the first sustainability sukuk globally based on the Shariah principle of musharaka. The issuance was also the first Asean sustainability SRI sukuk by a real estate property developer.

From the renewable energy sector, the Best Asean green SRI sukuk award goes to Leader Energy for its 260 million ringgit offering. The deal comprised of one- to 18-year tenors executed on a private placement basis with asset managers, insurance companies and banks among the investors.

Tiered pricing mechanism

Yinson Holdings also joined the green financing bandwagon in 2020 as it priced a 200 million ringgit sustainability-linked financing, which clinches the Best green financing, in Malaysia. The transaction featured a tiered pricing mechanism in which the company will benefit from preferential pricing upon meeting pre-agreed targets in relation to its environmental, social and governance (ESG) performance, allowing the sustainability-linked financing margin to increase or decrease depending on the company’s ESG performance as measured by the second-party opinion provider Sustainalytics.

Out of the MENA region, the other deals that defined the sukuk market in 2020 included the US$1.5 billion perpetual sukuk by port operator DP World, which represented the first-ever US dollar-denominated benchmark-sized perpetual sukuk by a corporate globally. This was also the largest-ever perpetual from the MENA region and the deal achieved a price compression of 50bp from the initial price guidance due to strong investor demand.

Qatar Islamic Bank (QIB) opened a new pool of liquidity for the GCC banks when it priced in January 2020 the first Formosa sukuk amounting to US$800 million. The offering, upsized from the original amount of US$650 million, was priced with a negative new issue premium of about 5bp inside QIB’s secondary curve.

But amid the continuing positive outlook for the sukuk market, a Fitch Ratings report in January this year cautioned that the rating outlook for sukuk remain challenged. The proportion of sukuk from issuers with negative outlook surged to 23.4%, compared to only 1.5% in 2019 due mainly to Covid-related disruption and low oil prices. Only one international sukuk defaulted in 2020, the NMC Health, a healthcare chain and distribution business in the UAE.

Also, as noted by Fitch, the sukuk market went through a transition in the first quarter of 2021 as issuers, investors and arrangers sought clarity regarding the regulatory changes in the UAE, including the implementation of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Standard 59. It observed additional dissolution triggers in new international sukuk documentation, including tangibility and delisting events and new put options.

Fitch says 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 slowed issuances, both domestic and overseas.

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The virtual awards ceremony for The Asset Triple A Islamic Finance Awards 2021 is scheduled to take place on September 15 2021.