GCC investors cautious on debut UK sukuk
Dubai, April 27, 2014
Gulf-based investors are thinking twice about subscribing to the United Kingdom's debut sovereign sukuk due to the pound's (Sterling) soaring value. However, the deal is still likely to be heavily oversubscribed with the likelihood of it being upsized, said a Gulf-based Islamic banker.
Initially anticipated for issuance in the first half of 2014, the UK Sukuk, to be denominated in Sterling is now expected in the final quarter of this year.
The case of Sterling strength is illustrative of the challenges London faces as it seeks to be the Western hub of Islamic Finance; that of the excess liquidity London seeks to tap is strongest in the energy exporting US dollar linked markets of the GCC and Malaysia, stated Naveed Mohammed in his blog, Sukuk.com.
Negative movements in currency valuations for the US dollar against Sterling will make UK-based investment decisions unattractive for such dollar-based investors, he stated.
Since the announcement of the intended issuance of the debut UK Sovereign Sukuk by Prime Minister David Cameron at the end of October 2013, Sterling has surged in value trading last week at yearly highs of over 1.68 against the US Dollar, up from 1.59 at the time of the announcement and seen in a slightly wider context up from 1.55 just a month prior to the announcement, noted Mohammed.
Whilst this near eight per cent increase may be welcomed in some quarters in the UK (lower fuel costs leading to lower inflation), it makes Gulf-based dollar linked investors think twice about subscribing to the UK Sovereign Sukuk, for whom subscription to the primary offering costs around 8 per cent more than it would have done in September 2013, he said.
This eight per cent hit is made more stark when we assume a maturity of 5 years for the sukuk, in which case it will likely yield a similar lowly amount to conventional gilt's at around 1.97 per cent, observed Mohammed.
Despite this, the strong domestic Sterling demand will ensure the UK Sukuk will be heavily oversubscribed, and indeed similar to Turkey's Sukuk debut, there is a likelihood the deal maybe upsized as demand will greatly outstrip supply, he added.-TradeArabia News Service