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Moody's: Global Sukuk Issuance Poised for Boost From New Legislative and Regulatory Initiatives

Global Credit Research - 13 Apr 2010

DIFC, April 13, 2010 -- Global issuance of sukuk (or Islamic bonds) is set to benefit from a number of legislative and regulatory developments over the next few years, Moody's Investors Service says in a new Special Report. However, for now, 2010 issuance looks likely to be in line with volumes last year, with most issuance expected to take place in the second half of the year. For the first half, supranational, sovereign and government-related issuers will continue to dominate the sukuk market.

"A key factor behind the recent and ongoing dominance by sovereign and government-related issuers was their need to launch a variety of funding programmes to combat declining economic activity, fiscal deficits and lower energy and commodity prices," says Faisal Hijazi, Business Development Manager for Rating Services and Islamic Finance at Moody's and author of the report. "By contrast, given the weak economic conditions, corporate entities have proved to be less able and willing to be major issuers of new sukuk, although a small number of highly rated corporate issuers did tap the sukuk market in large issuances."

Meanwhile, a number of jurisdictions are already developing legislative and regulatory initiatives that should enhance their ability to explore the sukuk market for the first time. The potential emergence of sukuk issuances from such new jurisdictions, including new markets in Asia (notably Japan, Korea and Thailand) and Europe (most likely the UK), would be a key driver of increased global issuance.

"Such moves could also prompt other jurisdictions with similar regulatory frameworks to pursue similar efforts in this direction. In addition, the more established sukuk markets, including those in the GCC, are also likely to undergo further legislative and regulatory developments, with beneficial implications for their sukuk issuance," Mr Hijazi adds.

In particular, legislative steps, such as the establishment of the Tadawul Bond and Sukuk market and the imminent introduction of the mortgage and finance law in Saudi Arabia and approval of a long-awaited capital market authority in Kuwait, are improving the prospects of sukuk becoming an attractive issuance structure, especially for local and cross-border investors. This was successfully demonstrated in Malaysia last year, with local currency issuances surging nearly 100% compared to 2008 levels.

Moody's believes the sukuk market has reasonable potential in other GCC countries, including Saudi Arabia, Kuwait, Qatar and the UAE, which still lag behind as regards sukuk issuance in comparison to their respective stock market size and the investment needs of many of their relatively sizable Shari'ah-compliant issuer and investor bases. Moreover, over the shorter term, the rating agency considers the recently announced Dubai World restructuring proposal as a positive development for the regional sukuk market. Its credit-friendly proposal and wider market acceptance will help increase issuers' appetite for new issuances due to the reduction in credit risk spreads and improve investors' sentiment.

"At the same time, the sukuk market is -- gradually -- acquiring characteristics of maturity, including a diversity of the investor base, encompassing both institutional and cross-border investors and fund industry managers. Moreover, the diversity of sukuk issuances across different jurisdictions and rating spectrums is creating an environment conducive to active fund issuance and asset management," Mr Hijazi says.

Moody's believes that the diversification of issuance (secured versus unsecured) and investors' appetite or risk aversion to investing in local and international issuances will be key determining factors going forward. Dar Al Arkan (Ba2, Stable) was the first issuer to tap the unsecured issuance market in 2010 with a US$450 million sukuk. However, based on the past two years of the global crisis, Moody's believes that investors will be cautious in their risk profiling of different sukuk opportunities.

The report also reviews 2009, when sukuk market issuance globally witnessed a clear turnaround compared to low volumes in 2008, when the impact of the global credit crisis started to be felt in many regions, including the Gulf Cooperation Council (GCC) and Asia Pacific. Issuances by sovereigns and government-related entities surged in particular, helping global sukuk issuances increase by over 50% year on year."

The report, entitled "Global Sukuk Issuance Poised for Boost from New Legislative and Regulatory Initiatives", is available at www.moodys.com.

*****

NOTE TO JOURNALISTS ONLY: For more information please contact EMEA Press Information in London +44-20-7772-5456; New York Press Information +1-212-553-0376; Juan Pablo Soriano in Madrid +34-91-310-1454; Alex Cataldo in Milan +39-02-914-81-100; Eric de Bodard in Paris +331-5330-1076; Detlef Scholz in Frankfurt +49-69-707-30-700; Mardig Haladjian in Limassol +357-25-586-586; Alex Sazhin in Moscow +7 495 228 60 60; Petr Vins in Prague +4202 2422 2929; Tokyo Press Information +813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635; Hong Kong Press Information +852-2916-1150; Hector Lim in Sydney +612 9270 8102; Luiz Tess in São Paulo +5511-3043-7300; Alberto Jones Tamayo in Mexico City +5255-1253-5700; Daniel Rúas in Buenos Aires +54 11-4816-2332 ext. 105; Leon Classen in Johannesburg +27-11-217-5470; Jehad el-Nakla in Dubai +971 4 401 9536; or visit our web site at www.moodys.com

DIFC
Faisal Hijazi
Analyst
Business Development Group
Moody's Middle East Ltd.
Telephone: +971-44-01-9536

DIFC
Khalid F. Howladar
VP - Senior Credit Officer
Structured Finance Group
Moody's Middle East Ltd.
Telephone: +971-44-01-9536

Moody's: Global Sukuk Issuance Poised for Boost From New Legislative and Regulatory Initiatives
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