Sukuk defaults remain rare, particularly for sukuk issued in hard currencies, such as USD, EUR, or GBP. Only 12 foreign currency-denominated sukuk defaulted over the past two decades. In most cases, these defaults were linked to the default of sukuk sponsors--who were unable to meet their financial obligations--and fraud cases. That relatively low default rate results from the fact that most sukuk are issued by creditworthy governments and their related entities, as well as large companies and financial institutions. In most default cases we observed, sukuk creditors were treated equally to conventional creditors. Yet this dynamic could change if Sharia Standard 62 comes into force.
What's Happening
Only 0.2% of sukuk defaulted over the past 24 years. Of the 22,794 sukuk issued for a total amount of about $2.1 trillion since Jan. 1, 2000, only 62 sukuk worth $5.2 billion defaulted. Foreign currency-denominated sukuk defaults are even rarer. Between Jan. 1, 2000, and Aug. 15, 2024, only 12 sukuk worth $3.7 billion defaulted out of the 1,267 sukuk that were denominated in hard currencies and issued for a total amount of $527.5 billion.
Why It Matters
Sukuk defaults are often linked to liquidity issues and sukuk sponsors' inability to meet their financial obligations. For example, Investment Dar defaulted on its $100 million sukuk in 2009 as it was reportedly unable to refinance upcoming maturities due to difficult market conditions. Garuda Indonesia defaulted on its $500 million sukuk in 2021 because the COVID-19 pandemic impaired the company's business activity. Sukuk defaults also resulted from financial fraud, as was the case with NMC Healthcare Ltd.'s default on a $400 million sukuk in 2020 and Saad Group's default on the $650 million Golden Belt sukuk in 2009. We understand that sukuk creditors were mostly treated similarly to other creditors and according to their ranking when the sukuk defaulted.
What Comes Next
The potential change in Sharia standards requires close surveillance. The Accounting and Auditing Organization for Islamic Financial Institutions' proposed Sharia Standard 62 could lead to a significant overhaul of sukuk structures. Generally, the adoption of new standards does not affect existing sukuk as any changes in the terms and conditions of sukuk are subject to investors' consent.
The timeline for the adoption of Sharia Standard 62 and its definitive version remain uncertain. If Sharia Standard 62 is adopted as proposed, we think the treatment of sukuk holders in a default scenario could differ from that of other creditors. We consider that the treatment could ultimately depend on the nature of the underlying assets and sukuk holders' capacity to liquidate them.
We envisage that Sharia Standard 62, if adopted as proposed, could lead to some instances of restructuring of outstanding sukuk. Companies with financial difficulties or unsustainable debt levels, as well as companies that are less reliant on the sukuk market or that face imminent liquidity issues, could use the change in Sharia requirements as an argument to restructure their outstanding sukuk. That was the case when Dana Gas PJSC restructured its two sukuk after it defaulted on them in 2016. That said, we expect companies will avoid restructuring their sukuk based on Sharia changes because it could restrict their market access or even trigger cross defaults. At Aug. 15, 2024, 9% of the sukuk rated by S&P Global Ratings were in the speculative-grade category ('BB+' and below.)
Related Research
- Sukuk Market: The Calm Before The Storm?, July 15, 2024
- Islamic Finance 2024-2025: Resilient Growth Anticipated Despite Missed Opportunities, April 29, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Mohamed Damak, Dubai + 97143727153; mohamed.damak@spglobal.com |
| Secondary Contacts: | Sapna Jagtiani, Dubai + 97143727122; sapna.jagtiani@spglobal.com |
| Xavier Jean, Singapore + 65 6239 6346; xavier.jean@spglobal.com | |
| Anais Ozyavuz, Paris + 33 14 420 6773; anais.ozyavuz@spglobal.com | |
| Dhruv Roy, Dubai + 971(0)56 413 3480; dhruv.roy@spglobal.com |
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