Demand for sukuk jumps on back of Dubai bond

The price of Islamic bonds, known as sukuk, have jumped 29 percent since February, a sign of growing demand among investors as the GCC recovers from the global crisis, new research showed on Tuesday.

The average yield on a GCC sukuk has fallen from 17.2 per cent in February to 10.1 percent, reflecting higher demand for the product as investors see a reduced risk of corporate default on the product, according to international law firm Trowers & Hamlins.

Neale Downes, partner at Trower & Hamlins, said: “The recent sharp rise in the average price of GCC corporate sukuk has been fuelled by the growing belief that corporate sukuk default risk has been greatly reduced. Many corporate sukuk are seen as effectively having a sovereign or quasi-sovereign risk attached.”

Sukuk issuances were hit by the global crisis but the market for the Islamic instrument is now picking up in the Gulf as companies look to raise money to fund expansion and projects.

Trowers & Hamlins said the rally in the world equity markets and Dubai’s $10bn bond programme had restored further confidence among investors.

“The bail-out of Dubai has demonstrated there is a great determination to control the impact of any further economic shocks within the region,” continued Downes.

“The GCC governments don’t want to see a Lehman Brothers take place in the Middle East. With governments standing so strongly behind their economies, the perceived risk of defaults in the Gulf is now far lower, pushing down sukuk yields to much more sensible levels.”

Sukuk are similar to bonds but instead of interest, which is forbidden under Islamic law, returns come from underlying assets.

Bahrain’s government is expected to issue $500m of sukuk at the end of month.

In February the Dubai government sold $10bn of bonds to the UAE Central Bank to raise capital for state-backed companies reeling from the global crisis.

The emirate plans to issue a further $10bn later in the year.

Earlier in the month state-backed developer Nakheel admitted it was receiving capital from the bond issue to help it complete more than $80bn of projects and restructure debt. 

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