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The busiest year on record for sovereign Islamic bond sales is poised to be eclipsed as a revival in corporate issuance takes hold in 2015.

Companies in the U.K. and Hong Kong may be among those selling sukuk this year as they follow debut issues from their governments, according to National Bank of Abu Dhabi PJSC, the biggest Middle Eastern underwriter of Islamic bonds in 2014. Corporates in the Gulf Cooperation Council will be encouraged to tap the market as bank liquidity and credit conditions deteriorate amid declining oil prices, Moody’s Investors Service said last month.

Islamic bond investors have been starved of options as established corporate issuers, led by those in the six-nation GCC, which accounts for about a third of all global sales, opted for bank loans over public debt. That’s in contrast to sovereign borrowers, which raced to tap an industry whose assets may climb to $2.6 trillion by 2017, according to PricewaterhouseCoopers LLP. Government borrowers sold 215 Shariah bonds last year as the number of company sales dropped to the lowest since 2004.

«I expect 2015 to witness a further maturing of the market as sukuk becomes increasingly relevant to global issuers», Andy Cairns, global head of debt origination and distribution at NBAD, the United Arab Emirates’ biggest bank, said by phone from Abu Dhabi on Dec. 29. Governments including in the U.K. and Hong Kong sold sukuk «to establish proof of concept for Islamic issuance, achieve investor diversification and encourage follow-on supply», he said.

Forced Out

In Asia, Malaysia Marine and Heavy Engineering has approval from the country’s securities commission for a 1 billion ringgit ($284 million) Islamic bond. In the Middle East and Africa, Al Baraka Banking Group plans to raise 300 million rand ($26 million) in South Africa, according to the chief executive officer, and Turkey’s Dogus Varlik Kiralama AS has approval from the Capital Markets Board to sell as much as $370 million in sukuk.

«The tightening of bank liquidity and credit conditions in the GCC may force more of the larger, quality corporates out to the public markets», Khalid Howladar, the Dubai-based global head of Islamic finance at Moody’s, said in a Dec. 17 e-mail. This year there will also be a «growing number of new and emerging sukuk markets», he said.

The U.K. became the first non-Muslim sovereign government to issue sukuk when it sold a 200 million-pound ($307 million) bond in June. In September, Luxembourg sold 200 million euros ($240 million) of five-year Islamic bonds, Hong Kong raised $1 billion and South Africa tapped the market for $500 million.

While the number of sovereign sukuk sales rose last year, the amount raised dropped 30 percent from a year earlier to $20.4 billion, the least since 2010. Corporate issuers raised $78.6 billion through 501 sales.

Oil Slump

Companies seeking to sell debut Islamic bonds instead of non Shariah-compliant debt have to meet additional criteria that may deter or delay them, according to Rizwan Kanji, a Dubai-based partner at King & Spalding LLP, a law firm that worked on Emaar Properties PJSC’s $2 billion sukuk program.

«The corporates need to have Shariah-compliant assets», Kanji said by telephone on Dec. 30. «The use of proceeds from the issuance of sukuk need to be Shariah-compliant too».

High-Yield Sukuk

Decreasing bank liquidity and demand for public debt will make sukuk issuance more attractive for GCC corporate borrowers this year, according to Mashreq Capital DIFC Ltd.’s Chief Executive Officer Abdul Kadir Hussain. Corporate, shorter-term sukuk may offer a better yield to investors, according to Bahrain-based Securities & Investment Co.

«By the first half of 2015, people will look for corporate, high-yield Sukuk», Najla Al Shirawi, CEO at SICO, said in an e-mail on Dec. 15. «And they will manage interest-rate risk by reducing duration».

Slumping crude prices are poised to erode both government revenue and cash at banks. Brent crude has declined 52 percent since a June peak. More than half of the Organization of Petroleum Exporting Countries’ 12 members are located in the region.

«When liquidity is declining and market volatility is higher, the sukuk market tends to be a little more attractive», Hussain, who oversees about $1.2 billion, said by phone on Dec. 30. «You will get potentially more corporate issuance».

Source: Bloomberg