Serba, PT Garuda default mars promising outlook for global sukuk

FOLLOWING a robust 2021, sukuk (Islamic bond) volumes in 2022 are expected to grow and remain a key financing source in core Islamic finance markets.

According to Fitch Ratings, growth will be anchored by robust Islamic investor appetite, funding diversification goals, and Islamic-finance development agendas in a number of countries.

“Downside risk stems from higher oil prices reducing a number of sovereigns’ funding needs, Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)-compliance complexities, traditional risks such as interest-rate rise, lower global investor appetite for emerging-market debt, and political risk,” the rating agency’s global head of Islamic finance Bashar Al-Natoor pointed out in a 2022 global sukuk outlook.

Total sukuk issued in 2021 grew a strong 36.1% year-on-year (yoy) to reach US$252.3 bil with central banks, governments and multilateral institutions dominated issuance.

This was despite challenges posed by AAOIFI standards implementation challenges, COVID-19 disruptions, and higher oil prices. Local-currency sukuk amounted to 80% of issuance.

The key jurisdictions of the Gulf Cooperation Council (GCC), Malaysia, Indonesia, Turkey and Pakistan issued US$230.2 bil of sukuk in 2021.

Non-core market sovereigns such as the UK, Maldives and Nigeria also issued sukuk. Fitch-rated sukuk reached US$132.4 bil in 2021, of which 80.1% were investment-grade.

“Outlooks improved with the share of sukuk issuers with negative outlooks falling to 8.8% in 4Q 2021 from 23.4% in 4Q 2020,” observed Fitch Ratings.

Global outstanding sukuk reached US$711.3 bil in 2021 or 12.7% higher than a year ago. Green & sustainable sukuk volumes expanded 17.2% year-on-year (yoy) in 2021 to US$15 bil with the theme likely to remain prominent in 2022.

However, a number of sukuk issuers defaulted in 2021, including Serba Dinamik Holdings Bhd and PT Garuda Indonesia.

To re-cap, Fitch Ratings had on Dec 13 downgraded Serba Dinamik’s long-term issuer default rating to “RD” (Restricted Default) from “C” following expiry of the 30-day grace period after the non-payment of the coupon on the group’s US$222 mil senior unsecured sukuk due in 2022.

The “RD” rating indicates an issuer that in Fitch Ratings’ opinion has experienced an uncured payment default but has not entered into bankruptcy filings and has not ceased operating. – Jan 12, 2022

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