SUKUK
The conventional wisdom of indicative Sukuk pricing MOHAMMED KHNIFER, SENIOR ASSOCIATE, DEBT CAPITAL MARKETS AT ISLAMIC CORPORATION FOR THE DEVELOPMENT OF THE PRIVATE SECTOR (ICD), WRITES EXCLUSIVELY FOR ISLAMIC BUSINESS & FINANCE
O
ne of the most known misconceptions among prospective issuers in emerging & frontier markets is that Sukuk pricing differs from bonds. Well, it does not. Debt Capital Market bankers use the same conventional wisdom for the pricing of bonds. Knowing the indicative pricing is the most decisive factor for reluctant issuers who weigh the other option of using loans or bonds.
KNOW-HOW Depending on the initial term length (tenor), a relative benchmark would be used for the Sukuk pricing. The size of the spread is denominated in basis points (bps) and it varies according to the risk of the borrower. The relative value of indicative pricing is driven by the following: • The issuer’s own outstanding Sukuk/bonds • The issuer’s credit default swaps • Peer group analysis If there is a lack of benchmark for a sovereign in terms of its own bonds, peer bonds could be used as a proxy to arrive at final pricing. Remember that pricing is an art. Hence, there could be other methodologies that will deliver almost the same results as the indicative pricing. In certain trades, there will be marginal to no difference in pricing between a Sukuk and a conventional bond for the issuer.
DISTRIBUTION AND DEMAND By capitalising on demand / supply gap, cost of
34
Islamic Business & Finance | ISSUE 119
funding can be lowered for the issuer. Sukuk supply/ demand imbalance may offset new-issue premiums. Sukuk attracts both conventional & non-interest demand across different investor classes. Some 50 per cent of the sovereign Sukuk issuances are subscribed by conventional bond investors. The addition of Islamic investors in the funding pool will create price tension between these two distinct investor types leading to better price discovery. All investor classes (Islamic, regional & international) are important to create price tension.
RATINGS Credit ratings agencies assess the relative credit risk of debt securities, borrowing entities (issuers of debt), and the creditworthiness of governments and their securities. Obtaining such ratings will facilitate the marketability of the Sukuk. From a credit perspective, Sukuk represents the same credit risk as that of the underlying obligor (borrower). MOHAMMED KHNIFER
Mohammed Khnifer can be reached by email at mkhnifer@isdb.org and on twitter @mkhnifer.
www.cpifinancial.net
