Sukuk pricing remains similar to bonds in H1 2023

The pricing of most sukuk and comparable bonds continued to be similar and highly correlated in the first half of the year, a trend that is expected to persist despite rising interest rates, volatile oil prices and complexities in sukuk structures linked to Shariah compliance.

Fitch Ratings analysed the pricing of 38 Islamic and comparable bonds issued by the same obligors in the GCC region, Indonesia and Türkiye (based on yield-to-maturity) with more than 60 per cent being sovereign issuance.

The rating agency said sukuk and bonds had a high pricing correlation of 0.95 (out of 1), a measuring gauge of investors’ credit risk perception for the two, on average and low average spreads between 2018 and H1 2023.

Fitch said spread differentials could also be explained by the buy-and-hold nature of most sukuk’s Islamic investors, mainly Islamic banks, with secondary-market liquidity of Islamic bonds tending to be limited compared with bonds. There remains a dearth of sukuk and comparable bonds in the market based on payment rank, date of issuance and maturity by the same issuer and in the same currency denomination.

The correlation between Pakistan’s dollar-denominated sukuk and bond yields was high between January 2022 and August 2023 at 0.95, Fitch said. However, the yield spreads have widened between the two with Islamic bonds pricing not falling as steeply as bonds – both are rated senior unsecured instruments by Fitch.

The MENA sukuk Index analysed by Fitch was up 1.3 per cent year-on-year in the first half of the year while the MENA Bond Index was up 0.03 per cent.

Islamic bonds are a sizable part of emerging-market debt issuance, excluding China, with its share reaching 6 per cent in H1 2023. The major sukuk-issuing jurisdictions of the GCC, Malaysia, Indonesia, and Türkiye are sizeable emerging markets, with their bonds and sukuk forming 20.5 per cent of all emerging-market debt issuance during the period under review.

Global Sukuk issuance

Fitch said Islamic bond issuance from the core markets of the GCC, Malaysia, Indonesia, Türkiye and Pakistan jumped by 10 per cent quarter-on-quarter (QoQ) to $49.1bn in the first quarter of 2023 while bond issuance dropped by 4.8 per cent.

The total volume of outstanding sukuk volumes exceeded $800bn for the first time in Q2 2023, while issuance is expected to slow in the third quarter coinciding with summer vacations in many countries.

“H1 2023 was a busy period for sukuk issuance on the back of issuers’ funding needs and diversification attempts as well as initiatives to develop the local debt capital markets,” said Bashar Al-Natoor, global head of Islamic Finance at Fitch Ratings.

Furthermore, global sukuk markets engaged with a diverse range of issuers, currencies and geographies in addition to greater issuance volumes.

Global Islamic bond issuance is expected to plunge in Q3 2023 before picking up pace in the last quarter of the year.

The majority of Fitch-rated outstanding sukuk were investment grade at 79 per cent, with 12.6 per cent of issuers having a positive outlook and 77.5 per cent having a stable outlook. Similarly, outstanding sustainability linked sukuk reached $30.5bn p 22.5 per cent QoQ.

Read: Global outstanding sukuk volume break the $800bn barrier