Insight archive for Henrik Raber | Standard Chartered

Why the sukuk market is soaring

Henrik Raber — Mon, 11 Dec 2017 09:32:24 +0000

As global debt markets rallied last year, growing 9 per cent year-on-year to reach the highest new issues on record, many market participants overlooked an even stronger global growth story – the international sukuk market.

Since its introduction to the global markets in the 1990s, the sukuk (or Islamic bond) market has grown significantly with no sign of slowing down, becoming a core segment for investors and an efficient financing route – compared to issuing equity, for instance – for many issuers.

While sukuk issuance volumes have averaged USD34 billion a year since 2010, last year saw volumes rise by another 15 per cent year-on-year, bumping the average annual growth rate of the market to 18 per cent since 2010. This puts sukuk growth during this period more than nine times the global bond market growth average.

Despite a relatively slow summer, the market reached an impressive USD38 billion at end of August, and the momentum has carried on, with sukuk volumes so far this year reaching USD49 billion – a record high.

Innovation integral to growth

Sukuk as an asset class has steadily transformed from a niche product into an integral component of global capital markets. Product diversification is an important part of a market’s development and the continued evolution of Sharia-compliant structures has boosted growth, with asset-light structures replacing traditional fixed asset-based structures, providing more flexibility to issuers.

"Another major growth driver for the market is the increasing US investor participation"

Innovation has been integral in the growth too. For instance, sukuk product offerings have expanded beyond the traditional vanilla instruments to include structures from other markets, such as capital securities in the bank tier 1 format, as well as industry-specific structures for the telecommunications sector.

Another major growth driver for the market is the increasing US investor participation in tandem with a sharp resurgence of sukuk issuances in a US investor friendly (144A) format.

So far this year, global sukuk new issues that are open to US investors have reached a peak of 40 per cent versus just 6 per cent in 2012, highlighting the growing comfort of US investors with Islamic structures. The recent success of large issuances, such as Saudi Arabia’s inaugural USD9 billion sukuk, will give confidence to potential issuers.

New growth areas

Many traditional bond investors, in their quest for portfolio diversification, want to see more sukuk issuances in the market.

Recent new deals like Saudia Arabia’s sukuk have been met with significant interest, largely driven by the wider investor base, which comprised both Islamic and conventional bond investors, directly supporting not only the primary market but also performance in the secondary market. As a result, more investors are encouraged to invest in varied bond formats, particularly in sukuk.

What’s next?

We expect the market to grow in three areas: financing opportunities on the back of China’s Belt and Road initiative, green (or socially responsible investment) sukuk and local currency sukuk.

The world’s first green sukuk was issued by Malaysia in July, and was hailed by the World Bank as an ‘historic event’ in the global capital markets. It was a milestone that laid the foundation for future issuances in the medium term, and created a secondary market for green sukuk, which is a critical consideration for investors still hovering on the sidelines.

"We think investors will be watching the sukuk space closely in the coming months"

Sukuk issued in local currencies are already open to international investors in many markets, and with that comes potentially lucrative currency exposure. The performance of several local-currency sukuk in recent months has highlighted the opportunity that investors looking at emerging markets stand to gain. Moreover, with the continued appreciation of some Asian currencies, we think investors will be watching the sukuk space closely in the coming months.

Asia’s bond market is flying high

Henrik Raber — Fri, 29 Sep 2017 08:00:15 +0000

Is Asia’s bond market coming of age? It certainly seems so based on issuance levels seen so far this year.

Asia’s bond markets in general have had a buyout year so far. Asia ex Japan (AEJ) issuance is up 61 per cent compared to this time last year, to USD221 billion, according to financial markets platform, Dealogic. While markets in the West slowed during the summer, Asia’s markets continue to buzz, and one segment that has particularly shined is its high yield market.

"Growth is down to historically low interest rates and volatility levels coupled with plentiful investor demand and liquidity"

High-yield issuance is up 350 per cent year-to-date in Asia ex-Japan compared to this time last year, totalling USD48 billion. European high yield volumes, by comparison, are up 39 per cent to USD75 billion, while US high yield issuance is up 11 per cent to USD145 billion.

Of course, Asia’s capital markets are less mature than those in the West, but the upward trend is nonetheless still impressive. The growth is down to multiple factors, including historically low interest rates and volatility levels coupled with plentiful investor demand and liquidity.

China’s leading the way

Regionally, Chinese issuers have contributed the bulk of high yield volumes with year-to-date issuance totalling USD38 billion and accounting for 80 per cent of Asia ex-Japan new issues, with South Asian and Southeast Asian issuers accounting for 11 per cent and 9 per cent, respectively.

While the geographical mix in volumes remained relatively unchanged from 2016, we have seen noticeable shifts in the sector mix. Real estate borrowers have continued to tap the high yield markets, bringing issuance from 29 per cent of last year’s total volume to 49 per cent this year. This was led largely by jumbo deals from the likes of property developers Kaisa Group and China Evergrande, the latter with USD6.3 billion in new issuance this year alone.

"Some companies have tapped the markets twice already this year"

And it’s not just the real estate market that’s favouring high yield bonds. The commodity industry has seen a surge in issuance, with their share of volumes almost doubling from 12 per cent in 2016 to 22 per cent this year. Some companies have tapped the markets twice already this year – the most notable being from India-based Vedanta Resources’s USD1 billion offerings.

Can it last?

Given the abundant high yield supply in Asia, many industry experts have asked how long the party will last. Sceptics have referenced several recently cancelled or postponed trades as an ominous sign of things to come. Undoubtedly, there will be times when deals needed to be adjusted post investor feedback and these tended to be higher risk (single-B rated) credits and debut issuers. The latter also have the additional challenge of shorter performance track records, adding to investor hesitation about investing in Asian high yield bonds.

Nevertheless, this market sentiment has not deterred issuers or affected market confidence, as demonstrated by China property developer Agile Group’s highly oversubscribed deals this year.

Belt and Road boost

Asia’s capital markets are deepening, with the breadth of issuers expanding. On the supply side, we expect the pace of issuance to continue, especially as Asian borrowers have followed a trend seen in the West over the past decade – increasingly favouring bonds as a source of financing rather than the traditional route of funding via banks, particularly as banks face capital constraints in the new Basel era.

On the demand side, we expect the base of investors to grow as Asia’s emerging economies continue to develop, especially as market infrastructure and legal frameworks grow to support bond markets. Project bonds (typically used to finance infrastructure projects), for example, are a significant opportunity in Asia, given the region’s massive infrastructure funding needs in the next decade, and with China’s Belt and Road initiative fuelling more opportunities.

There is certainly room for Asia’s bond markets to deepen, and we expect its high-yield market to continue its upward trend.

The future’s bright, the future’s green

Henrik Raber — Mon, 17 Jul 2017 08:00:41 +0000

We are entering a new era of green finance. Global leaders and corporations are doing more to reduce their impact on the environment, and the transition to a greener, more sustainable future presents both new opportunities for business and much-needed investment into emerging markets.

The 2015 Paris Climate Agreement (PCA) further galvanised commitments to green initiatives and technology across the globe. As a result, we’ve seen unprecedented growth in the issuance of green bonds – bonds linked to climate change solutions.

According to the Climate Bond Initiative (CBI), the market saw more than 90 new issuers last year. We believe this brought total green bond issuance to over USD85 billion in 2016 – more than double the 2015 figure.

"Green bond issuance could reach USD150 billion this year, according to the Climate Bond Initiative"

The green bond market continues to mature and diversify, and demand from investors – regardless of whether they have a green mandate, currently far outstrips supply.

Despite US President Trump pulling out of the PCA, it has not stopped US companies contributing. Apple, for instance, reaffirmed its commitment to the environment by issuing a mammoth USD1 billion worth of green bonds last month, building on its USD1.5 billion issuance a year ago.

We can also expect more issuances from sovereigns, as governments seek to finance infrastructure development on a large scale on the back of the PCA agreement.

This could see green bond issuance reach USD150 billion this year, according to the CBI, and the OECD expect issuance to reach up to USD720 billion a year by 2035.

ASEAN is lagging behind

Despite the flurry of activity worldwide, the Association of Southeast Asian Nations (ASEAN) has been hesitant to venture into the green bond market, something which was a hot topic at a recent annual green bonds conference we held in Singapore.

Most of ASEAN is still undergoing rapid modernisation, and the region is expected to grow by a robust 5.2 per cent between 2016 and 2020 according to the OECD. Much of ASEAN’s infrastructure and industry is also still under development, which presents a rare opportunity to bypass traditional polluting, resource-inefficient technologies and practices in favour of sustainable ones.

There is an initiative in place to develop so-called ASEAN Green Bond Standards, which should be a great first step in tackling the issues faced by the market. Based on the International Capital Market Association’s Green Bond Principles, the standards are expected to provide consistency and transparency.

"Governments need to be enablers of green bonds, introducing policies on both the supply and demand side"

Standards will also help to eliminate ‘greenwashing’ – the practice of using proceeds from green bonds towards non-green purposes. There will be a set of principles for classification and information disclosure, which will go a long way to maintaining the credibility and integrity of this new market and help promote this ASEAN asset class to global investors.

The Green Bond Grant scheme introduced by Singapore’s financial regulator should also help the market get on its feet. The scheme, which aims to offset the cost of external reviews for green bond issuances, shows how policymakers can encourage the growth of green bonds.

These steps all indicate that ASEAN governments have taken notice of the burgeoning green bond markets in neighbouring China and India. But more has to be done. Governments need to be enablers, introducing policies on both the supply and demand side, to promote market confidence and spur growth.

The investor point of view

As for investors, the rationale for holding green bonds in your portfolio is strong. Green bonds and conventional bonds are comparable in almost every aspect, but green bonds have exposure to sectors with environmentally friendly businesses, allowing investors to further diversify their portfolio.

Policy makers play a large role in developing ASEAN’s capital markets for green bonds, but issuers and investors need to come together in a collective effort to develop the market. If this happens, there is huge potential in the ASEAN green bond market for all market players to capture.