Arabian Gulf sukuk may reach $5bn in Q4

Banks and companies in the Arabian Gulf may issue the most Islamic debt in three years in the fourth quarter as economic growth accelerates and Dubai’s companies reach agreements to restructure debt.

The Islamic Development Bank, a Jeddah-based multilateral lender, said on Aug. 24 it would raise $1 billion selling debt that complies with Shariah law’s ban on interest, taking planned offerings for the remainder of the year to $5.5 billion.

That would be the most since the third quarter of 2007, when Gulf sukuk issuance totaled $5.7 billion, according to data compiled by Bloomberg. Sales from the region have declined 24 percent to $2.5 billion so far in 2010, as three companies sold Islamic debt, Bloomberg data show.

“Investors are hungry for supply,” Naji Nabaa, a Dubai- based associate director of fixed-income sales for the Middle East and North Africa at Exotix Ltd., an investment bank specializing in illiquid assets, said in a telephone interview on Tuesday. “There’s a cash pile that has built up. Now that we’re seeing an early settlement between Dubai World and banks, it has given the credit markets some impetus to rally.”

Dubai World’s agreement earlier this month with 99 percent of its creditors to restructure $24.9 billion of borrowings reduced the risk that the company will default, bolstering investor appetite for higher-yielding Islamic debt after two- year Treasury yields fell to record lows. Economic growth in the Middle East will accelerate to 4.5 percent this year, from 2.4 percent in 2009, the International Monetary Fund said on July 7.

The United Arab Emirates, the third-largest economy in the Arabian Gulf, may sell Islamic securities, central bank Governor Sultan bin Nasser Al Suwaidi said in March. Albaraka Banking Group, the largest publicly traded Islamic lender in Bahrain, plans to sell $200 million of sukuk by the end of the year, it said in a statement Aug. 24.

The combination of declining yields in emerging markets and a successful restructuring of state-owned Dubai World’s debt may spur more sales, according to Exotix and Royal Capital PJSC.

The average yield on sukuk sold by Gulf Cooperation Council issuers fell 26 basis points, or 0.26 percentage point, this month to 6.26 percent on Tuesday, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The average yield reached this year’s low of 6.21 percent on Sept. 16.

The extra yield investors demand to hold Dubai’s dollar sukuk rather than Malaysia’s 3.928 percent Islamic note due June 2015 has narrowed 43 basis points to 369 this month, according to data compiled by Bloomberg. The yield on Dubai’s 6.396 percent sukuk maturing in November 2014 rose five basis points to 6.38 percent on Tuesday, the data show.

Arabian Gulf sukuk have returned 4.7 percent this quarter, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. Debt in developing markets gained 6.7 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The spread between the average yield for emerging-market sukuk and the London interbank offered rate shrank 68 basis points to 375 this quarter, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The extra yield investors demand to hold developing nation debt rather than U.S. Treasuries narrowed 45 basis points to 292 in the same period, according to JPMorgan Chase EMBI+ indexes.

“The compression in spreads and higher risk taking in the region encourages investors to consider sukuk structures, which usually carry a yield premium over conventional issues,” Ahmed Talhaoui, the head of portfolio management in Abu Dhabi at Royal Capital, which is 44 percent owned by United Gulf Bank, an investment bank in Bahrain, said in an e-mailed response on Tuesday. “Any Dubai World debt resolution is positive for sukuk.”

Ahmed Salem Bugshan Group, a Saudi Arabian company that owns and operates steel plants, plans to raise as much as $100 million from Islamic bonds to fund projects, Mohamed H. Zakaria, senior vice president of the group, said in June. Doha-based Qatar Islamic Bank, the emirate’s biggest Shariah-compliant lender, plans to sell as much as $750 million, Chief Executive Officer Salah Mohammed Jaidah said in May.

Nakheel PJSC, the property unit of Dubai World, may issue as much as $3.2 billion of five-year sukuk to pay contractors as part of its debt restructuring plan, JPMorgan Chase London-based analyst Zafar Nazim wrote in a report Aug. 26.

Dubai World said on Sept. 10 it expects to conclude its debt restructuring in the “coming weeks.” A group of Nakheel creditor banks supported a plan to alter the terms on $10.5 billion of loans and unpaid bills, the company said July 14. In April, the company said its trade creditors would be offered 100 percent recovery of their claims -- 40 percent through a cash payment and 60 percent in the form of a tradable sukuk.

The yield on Nakheel’s 2.75 percent $750 million Islamic notes due in January 2011 fell 521 basis points to 10.6 percent this month, and is down from 124 percent on Feb. 26, the highest level this year, according to prices compiled by Bloomberg.

This year, Saudi Electricity Co., the region’s largest utility, issued 7 billion riyals ($1.9 billion) in April. Dar Al Arkan Real Estate Development Co., the biggest Saudi Arabian developer by market value, sold $450 million of Shariah- compliant debt in February. National Bank of Abu Dhabi PJSC, the U.A.E.’s second-largest lender by assets, sold 500 million ringgit ($161 million) in the only Islamic debt offering from the emirate so far this year.

Some analysts say more needs to be done before bond sales increase. Governments in the Arabian Gulf haven’t borrowed through global sukuk sales since the Dubai Department of Finance issued a $1.25 billion Islamic bond in October.

“Confidence in the industry needs to strengthen in order for sukuk sales to pick up,” Dubai-based Bashar Al-Natoor, director at Fitch Ratings Europe Middle East Africa corporates team, said in an e-mail on Sept. 20. Issuance may pick up in the fourth quarter “provided economies worldwide stabilize and market sentiment toward Islamic bonds in the region improves,” he said.

Kuwait’s Investment Dar Co., owner of half of Aston Martin Lagonda Ltd., was the first company from the region to default on a $100 million sukuk in April last year, triggering concern about restructuring laws for such securities. National Central Cooling Co., a Abu Dhabi-based refrigeration company, said on May 27 it hasn’t made distribution payments on its 1.7 billion- dirham ($463 million) sukuk.

Spending by governments in the region may help accelerate Islamic bond sales, Royal Capital’s Ahmed said.

Saudi Arabia plans to invest $385 billion over the next five years on infrastructure, education and health, the Saudi Arabian embassy in Washington said on Aug. 12. Qatar and its state-owned companies plan to spend as much as $100 billion within the next four years, Finance Minister Yousef Hussain Kamal said June 10. (Bloomberg)