Cross-border corporate sukuk issuances to rise sharply in 2023

Cross-border corporate sukuk issuance is set to rise significantly from 2022 lows, with companies in the Gulf Cooperation Council (GCC) countries and Malaysia (A3 stable) accounting for most of the issuance, said Moody’s recently.

Despite challenging market conditions, year-to-date cross-border corporate sukuk issuances as of 18 May 2023 have already doubled from the issuance volume in full-year 2022 to $5.2 billion, said Maisam Hasnain, a Moody's Vice President and Senior Analyst.

"The increase was driven by companies that postponed issuance last year because of capital market volatility, companies seeking to refinance near-term sukuk maturities and first-time rated sukuk issuers looking to diversify funding sources," said Rehan Akbar, a Moody's Senior Vice President.

Sukuk programmes that Moody's has rated this year include a $3 billion program under Saudi Electricity Company (SEC, A1 positive) and a $5 billion program issued under Malaysia's sovereign wealth fund, Khazanah Nasional Berhad (A3 stable), the credit rating agency noted.

Sukuk structures continue to vary, but their credit quality and the ratings that Moody's assigns ultimately depend on the senior unsecured credit risk of the underlying corporate, the firm said. 

For example, while the underlying sukuk assets in the SEC and Khazanah programs differ, sukukholders are effectively exposed to the senior unsecured credit risk of the respective underlying corporate, Moody’s added . 

Sukuk dissolution events for both programmes are aligned with events of default provisions that would be present in conventional bond programmes, according to the firm.

Unlike their counterparts in the GCC, rated corporate sukuk issuers in Malaysia do not have strict put option clauses in their sukuk documentation that sukukholders would be able to exercise if the ratio of tangible assets to total sukuk assets (tangibility ratio) falls below a certain threshold, Moody’s pointed out. 

Despite such a clause, GCC issuers are not significantly exposed to the risk of put options being exercised because the risk of their tangibility ratio falling below the minimum threshold is remote, the firm said.