The Middle East war could lead to total and partial loss events for a small number of rated sukuk, particularly where they have underlying assets targeted by attacks, according to S&P Global Ratings’ deep dive analysis.

The observation from S&P comes after examining the top-rated sukuks to identify areas of heightened risks in the current environment. As per its findings the sukuk backed by industrial or commercial real estate are the most vulnerable.

"We expect the war will affect the volume of sukuk issuance in 2026, with the extent of the decline dependent on the duration of hostilities and their impact on the GCC region’s real economy, said the statement for S&P.

“Sukuk backed by industrial or commercial real estate, which represents 3% of the sukuk we rate, are most vulnerable,” said S&P Global Ratings' analyst Mohamad Damak. “Should their assets be damaged in an attack, it could test the robustness of sukuk legal provisions for risk coverage.”

"We currently rate more than $180 billion sukuk (programs and stand-alone issuances), with over 50% located in the GCC region," stated Damak. 

The top ratings agency said the sukuk market issuance has not yet been significantly affected by the Middle East war.

Total issuance reached $62.4 billion in first-quarter compared with $52.6 billion in first-quarter 2025. 

This increase included an uptick in foreign currency-denominated sukuk, which reached almost 20% over the same period. 

In GCC countries S&P Global Ratings observed a slight increase in overall issuances, though there was a decline in those denominated in foreign currency. 

"We expect this slowdown to continue until the war concludes and its implications for GCC economies and sukuk issues become clearer. The war may also bring some risks that are unique to sukuk, relating to their underlying assets," stated Damak.

The new S&P report identified the potential for total loss events (TLE) and partial loss events (PLE), specifically physical destruction of or damage to assets, and the sponsor’s ability to meet contractual obligations, he added.

Rated sukuk issued by financial institutions would typically exclude TLE/PLE risk because these are embedded at the level of the underlying asset, and their materialization would typically disqualify the assets from the eligible pool and require the sponsor to replace it.

Damak pointed out that an increased probability of TLE/PLE coupled with uncertainty regarding sponsor payments could lead to negative rating actions - in some cases by several notches. 

S&P Global Ratings will continue to monitor the risks of physical destruction of assets and the credit impact on a case-by-case basis, he added.-TradeArabia News Service