(Bloomberg) -- Global offerings of sukuk are off to their busiest start on record this year, with bankers at HSBC Holdings Plc and Deutsche Bank AG citing the high price of oil as a driver of the vibrant issuance.
Sales of new sukuk maturing in at least a year have touched nearly $24 billion so far in 2022, the best start to any year, according to Bloomberg-compiled data going back to 1999. Saudi Arabia and Turkey were the two biggest issuers.
Although it slid on Thursday, crude is up roughly 40% this year, leaving investors in oil-producing countries, some of the biggest markets for Islamic finance, flush with cash. With fixed-income markets in upheaval as the U.S. raises interest rates, Shariah-compliant debt has fared better than global bonds with investment-grade ratings, losing only 4% versus their 7% dive so far this year, according to Bloomberg indexes.
“There has been pent-up liquidity and demand for Islamic Sukuk for quite a while and that, coupled with challenging market conditions overall affecting primary and secondary markets, is driving increasing interest in sukuk issuance relative to conventional bond issuance,” said Khaled Darwish, Middle East and north Africa's head of debt capital markets at HSBC.
The bank is the top arranger of sukuk deals this year, Bloomberg-compiled data show.
In a world of rising interest rates, investors often favor debt with shorter maturities, which adds to the attractiveness of sukuk.
The average duration of a note in Bloomberg's index of global dollar sukuks is just about four years. That compares with more than seven years for a Bloomberg gauge of global high-grade notes in various currencies.
“Many issuers are dynamic, with diversified funding avenues, and select to tap the market which offers strong liquidity,” said Agata Raszkiewicz, head of Southeast Asia debt capital markets at Deutsche Bank. The popularity of sukuk “can be partly attributed to higher oil prices boosting sentiment of some Middle Eastern investors.”
Read: Shorter Maturities Insulate Asia Credit From Global Yield Rise
But the boom may not endure. Accelerating inflation is bad news for fixed income investors, and Russia's Ukraine invasion has hurt appetite for emerging-market assets, Fitch Ratings wrote earlier this month.
The commodities boom may actually hamper issuance as it reduces the need for external financing.
Moody's Investors Service sees lower sales in 2022 compared with last year. CIMB Investment Bank Bhd, a key arranger in Malaysia, the world's largest sukuk market, isn't quite so pessimistic.
“Global sukuk issuance volume is expected to be flat for the remainder of 2022,” CIMB's Chief Executive Officer Jefferi Hashim said.
Elsewhere in credit markets:
EMEA
Seven borrowers are offering new bonds in Europe's primary market on Thursday, lifting sales for the week beyond 35 billion euros and yearly volume past 500 billion euros.
- Europe's junk-rated firms face higher refinancing costs as Russia's invasion of Ukraine exacerbates concerns over borrowing amid an alarming rise in inflation and the prospect of tighter monetary policy. Sales of new high-yield bonds collapsed 70% in the first quarter as sentiment for sub-investment grade credit soured
- The S&P 500 on Wednesday closed lower for the first time in five days and the Nasdaq 100 dropped as talks earlier this week between the two countries failed to produce a short-term cease-fire or major progress toward a broader peace deal
- Officials from Ukraine and Russia are set to resume talks via video conference on Friday, according to Ukrainian negotiator David Arakhamiya
- Russian government bondholders would be left with no viable path to recover their money if the country defaults, according to one of the top global lawyers in sovereign debt litigation. Jay Auslander believes there would be little scope for litigating Russia in court in case of a default at least until the end of the conflict in Ukraine
- Elsewhere, EnQuest has invited holders of 190.5 million pounds 7% notes originally due February 2022 and extended to October 2023, to exchange them for new 9% notes due October 27, 2027
- For more on Russia's debt watch: Russia Debt Watch: Russian Railways, EuroChem, Petropavlovsk
Asia
Three companies marketed dollar bonds in Asia on Thursday as investors monitor whether a U.S. plan to release crude from its reserves will help contain inflation.
- Asia ex-Japan investment-grade credit default swaps widened for a second day, the longest such streak in more than two weeks
- Spreads on Asian investment-grade dollar bonds were flat to 2bps wider. Chinese high-yield dollar bonds, dominated by developers, are on track for their 10th gain in 11 sessions
- Dollar bond issuance in Asia excluding Japan has dropped off from the week before, with sales of around $3.8 billion so far this week versus more than $9 billion the week before
Americas
At least four issuers sold new U.S. high-grade bonds, including Workday Inc. and DT Midstream Inc.
- Churchill Downs Inc., owner and operator of the racetrack that hosts the annual Kentucky Derby, tapped the U.S. high-yield bond market for $1.2 billion to help finance its asset purchase of Hard Rock Sioux City-owner Peninsula Pacific Entertainment LLC
- The eight-year notes were upsized from an initial target of $900 million
- For deal updates, click here for the New Issue Monitor
- For more, click here for the Credit Daybook Americas
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