Sukuk pricing distorted by thin secondary market

Corporate issuers are eager to return to the Islamic bond market but a lack of secondary trading could distort the pricing of an estimated US$45 billion (RM166.5 billion) worth of sukuk in the pipeline and deter future issuance, Reuters reported on Mar 3.
The credit crunch and growing prospects of a global recession have virtually frozen sukuk markets worldwide, and the issue of distorted pricing could exacerbate issuers' reluctance to return to the markets, threatening a crucial source of funding for companies and governments, the report said.
"The problems would be in terms of the ability to price properly the sukuk. There is the issue of reluctance on the part of the issuer to issue in the sukuk market. If it's illiquid, then price distortion may occur, and it might reflect badly on them. It creates a benchmark for themselves," it quoted Badlisyah Abdul Ghani, chief executive of CIMB Islamic, which is the world's top sukuk arranger.
The report also said Mohamed Damak, credit analyst at ratings agency Standard & Poor's, recently estimated that globally pent up demand of more than US$45 billion is waiting to be released by issuers waiting for more favourable markets, while a report by McKinsey released in November estimated that only about 25% of total outstanding sukuk is listed.
Secondary sukuk trading in Malaysia, which was the world's second-largest Islamic bond issuer last year, according to Islamic Finance Information Service, is thin relative to the conventional market, it added.