The past five years have seen a rapid surge in the issuance of Sukuk securities, sometimes known as Islamic bonds, across Asia and the Middle East, Moody's Investors Service says in a new Special Comment on the topics Shari'ah and Sukuk finance. Although the global market is relatively small at $41bn (with $30bn in Malaysia), the issuance potential in the Gulf is very high. While volatile, the average growth rate of Gulf Sukuk is around 45% year-on-year since 2001, reaching $11bn to date. The market is further expected to grow as part of the systemic Middle Eastern growth in long-term conventional debt financing combined with a drive to tap the deep pool of Islamic liquidity.
Malaysia, where approximately 75% of corporate issuance was Islamic in 2005, may provide some indication of future demand. Sukuk are better described as 'Trust Certificates' or 'Participation Securities' that grant the investor a share in an asset along with the cashflows and risk commensurate with such ownership. However while such a description may be consistent with conventional Asset-Backed Securities ("ABS"), Moody's report shows that dependent on the structure, the underlying credit risk of such investments can be more similar to conventional unsecured financing.
"In this context, Shari'ah or Islamic law adds an extra dimension to the legal analysis that needs to be considered if there is possibility that its inclusion will have a material impact on the credit risk profile of the Sukuk" explains Khalid Howladar, a Moody's Vice President-Senior Analyst and author of the report.
Moody's Special Comment -- entitled "Shari'ah and Sukuk: A Moody's Primer" -- introduces to investors some of the basic concepts and terminology behind Sukuk, Shari'ah and Islamic finance, focusing on those principles and issues that are most relevant to the credit risk analysis of such investments. From the agency's analytical perspective, such structures simplistically fall into two categories: (i) Asset-Backed Sukuk, for which ratings are primarily dependent on a risk analysis of the assets, and (ii) Unsecured (Repurchase) Sukuk, for which ratings are primarily dependent on the risk profile of the borrower/sponsor/originator/lessee.
"It should be noted that, while most Sukuk will have some assets in the structure, Moody's will only consider them to be asset-backed or asset-secured if the key securitisation elements are in place. If this is not the case, then our rating is governed more by the credit risk of the borrower/originator and our conventional corporate finance analysis applies," says Howladar.