Latest news with #AAOIFIShariaStandardNo.62
Zawya
20-02-2025
- Business
- Zawya
Sukuk and bond pricing remains correlated as spreads narrow despite volatility
Fitch Ratings - Jakarta/Dubai: The pricing of comparable sukuk and bonds analysed by Fitch Ratings remained highly correlated in 2024 for the fifth-year running with spreads between the two instrument types further narrowing despite regional geopolitical tensions, economic volatility and sharia-compliance uncertainties, says Fitch Ratings. It is unclear whether these dynamics will impact this trend over 2025 and 2026. The pricing correlation was about 0.95 (on a scale of 0 to 1) for 56 comparable sukuk and bonds analysed by Fitch between 2019 and 2024, based on yield-to-maturity (YTM). The full-year 2024 correlation dropped to 0.91, which is still high given the relatively small size of the analysed pool. At the same time, average spreads between comparable sukuk and bonds narrowed to 10bp in 2024 from 25bp in 2023 and 27bp in 2022. Between 2019-2024, sukuk had lower yields on average than comparable bonds in about 50% of the analysed cases, while 39.3% of sukuk had similar yields to comparable bonds, and 10.7% had higher yields. This analysis can offer insights into investor perceptions of credit risk between sukuk and bonds. The instruments were mostly issued by entities from the Gulf Cooperation Council, Indonesia, and Turkiye, covering sovereigns, financial institutions, corporates, and international public finance. Still, there have been instances where pricing correlation fell, at least for a brief period before reverting, due to macroeconomic or sharia-specific events. Also, it should be noted that there are few directly comparable sukuk and bonds with close similarity in payment priority, issuance dates, maturity, and currency denomination from the same issuer. These findings are also observed with the S&P MENA sukuk and bonds indices, which had a correlation of 0.99 over the five years ending December 2024 based on YTM with a 27bp spread between sukuk and bond yields. The spread also further narrowed in 2024, averaging 15bp. Among the uncertainties facing the market is AAOIFI Sharia Standard No. 62 which, while still in draft format, could be finalised and issued in 2025. Among key proposals is the transfer of legal ownership and associated risks of the underlying sukuk assets to the sukuk holders, granting investors asset recourse to ensure closer adherence to shariah principles. Any impact of AAOIFI Standard 62 implementation on sukuk pricing compared to bonds depends on the final version, which jurisdictions and entities adopt it, and, most importantly, how it is reflected in sukuk documentation. New sharia-related requirements in sukuk documents, which are not usually seen in conventional bonds, did not appear to have an impact on pricing in 2024. These includes terms in the sukuk documentation related to asset-inspection, asset takeover, sharia-compliant hedging, and partial payment of the periodical distribution amount in certain circumstances and for limited period. Fitch expects global sukuk to surpass USD1 trillion outstanding in 2025, remaining a key part of the debt capital market in a number of Organisation of Islamic Cooperation countries. Investor demand for many sukuk remains intact, mainly from GCC Islamic banks that have adequate liquidity. Global outstanding sukuk rose 10% to USD930 billion at end-2024 year on year despite regional geopolitical tensions. The use of sukuk is also expected to remain a significant tool in emerging markets having totalled 12% of all emerging market US dollar debt issued in 2024 (excluding China). About 81.4% of Fitch-rated sukuk are investment-grade as of end-2024. Sukuk default rates globally are very low, at only 0.19% of all sukuk issued as of end-2024. -Ends- Media Contact: Matt Pearson Senior Associate, Corporate Communications Fitch Group, 30 North Colonnade, London, E14 5GN E:
Zawya
29-01-2025
- Business
- Zawya
Fitch Ratings adds new OIC countries for recovery ratings
Dubai/Toronto: Despite the inclusion by Fitch Ratings of five additional Organisation of Islamic Cooperation (OIC) countries to the Country Groups for the Country-Specific Treatment of Recovery Ratings, about 70% of OIC countries continue to remain categorised in Group D. This group consist of countries where recoveries given default range from average to poor, underscoring ongoing challenges in recovery projections. The total number of OIC countries reported now stands at 19. In Fitch's Country Groups, the UAE and Qatar continue to have the highest classification among the now 19 covered OIC countries, in Group B where recoveries given default range from superior to poor. This is followed by Group C, where recoveries given default range from good to poor, and includes Saudi Arabia, Malaysia, Bahrain, and Oman. Countries in Group D include Turkiye, Egypt, Indonesia, Bangladesh, Morocco, Nigeria, Tunisia, Azerbaijan, Jordan, Kazakhstan, Uzbekistan, Gambia, and Sierra Leone. None of the 19 OIC countries are in Group A, where recoveries given default range from outstanding to poor. Sukuk default rates globally are very low, at only 0.19% of all sukuk issued as of end-2024. This is due to the predominance of sovereigns and supranationals as sukuk issuers at 57% among Fitch-rated sukuk, followed by financial institutions at 17%. Fitch rates over 70% of the global outstanding dollar-denominated sukuk, with 81.3% being investment-grade and 91.3% of sukuk issuers maintaining Stable Outlooks. There remains resolution uncertainty for both sukuk and bonds in many sukuk-issuing countries, due to the lack of precedents for default resolution and the still-developing nature of the debt capital markets. Additionally, the decisions of a court in one case will have no binding authority with respect to another case in many sukuk-issuing countries, including in the GCC. No sovereign sukuk has defaulted to date, with most sukuk defaults linked to corporates, and some by financial institutions. Apart from few court-supervised sukuk default resolutions over the past five years, most sukuk defaults were resolved out of court, resulting in limited transparency on the final outcome. The majority of sukuk issued to date globally are originator-backed (or asset-based) and senior unsecured, with sukuk investors generally having no rights of enforcement against the underlying trust assets. Secured sukuk could provide additional security for investors, and it is possible these could be rated above an issuer's senior unsecured debt ratings. However, we apply no notching uplifts for secured debt for Group D countries, wherein the majority of the reported Muslim-majority countries lie. There is a lack of established securitisation markets in most major Islamic finance jurisdictions across both bonds and sukuk. However, this may change to some extent with the introduction and adoption of the AAOIFI Sharia Standard No. 62 on sukuk, which is in exposure draft format. Draft texts have featured provisions requiring the transfer of legal ownership of the underlying sukuk assets, and related risks, to sukuk holders, who would have recourse to these assets, among other areas. The impact will depend on the finalised standard, which jurisdictions and entities adopt it, and, most importantly, how it is incorporated into sukuk documentation. Country Groups Country Groups constrain the assignment of recovery ratings (RRs) and the upward notching of instrument ratings from Issuer Default Ratings (IDRs) to reflect less predictable range of recovery outcomes in certain jurisdictions based on country-specific factors. Countries are classified into four groups, each with different caps on instrument ratings and RRs. Instruments by issuers in countries in group A can be assigned RRs up to 'RR1'; group B up to 'RR2'; group C up to 'RR3', and group D up to 'RR4'. The classing into groups is anchored on an assessment of each country's governance environment, leveraging three indicators reported by the World Governance Indicators project of the World Bank: Rule of Law, Regulatory Quality, Control of Corruption. Fitch may apply a qualitative overlay to adjust downward the grouping of a country when we recognise material insolvency-specific factors, not reflected in the general governance assessment by World Governance Indicators project of the World Bank, that may have a significant influence on the predictability of insolvency outcomes within a jurisdiction. Media Contact: Matt Pearson Senior Associate, Corporate Communications Fitch Group, 30 North Colonnade, London, E14 5GN E:
