Bahrain sukuk beat Dubai as emergency lifted

Rally in Bahrain's Islamic bonds may help restore confidence, revive issuance from Arabian Gulf

Bahrain’s decision to end a three- month state of emergency is restoring confidence in the island nation’s Islamic bonds.

While protests toppled leaders in Egypt and Tunisia and fighting rages in Libya and Syria, Bahrain quelled violent street protests. The yield on Bahrain’s 6.247 percent sukuk maturing June 2014 dropped 115 basis points since March 31 to 2.81 percent, approaching a four-month low reached last week. The notes returned 4 percent this quarter, compared with 3.2 percent for sukuk in Dubai, 2.5 percent for Malaysia and 1.7 percent in Indonesia.

The rally in Bahrain’s bonds may help revive issuance from the Arabian Gulf after Albaraka Banking Group, the kingdom’s biggest publicly traded lender, delayed its plan to sell sukuk until September because of political turmoil. Sales of Shariah- compliant securities from the six-member Gulf Cooperation Council dropped 20 percent to $1.9bn in 2011 from the year-earlier period, data compiled by Bloomberg show.

“Now that the fear of political unrest is starting to move into the background, people are looking to buy Bahrain’s sukuk again,” Dubai-based Abdul Kadir Hussain, who helps oversee $2bn in fixed-income assets as chief executive officer at Mashreq Capital DIFC, said in an interview June 16. “The fact the sukuk is investment grade allows some people to buy it, while Dubai still isn’t rated.”

Yields on Bahrain sukuk climbed to 4.45 percent on March 15, the highest level in a year, as King Hamad Bin Isa Al Khalifa, a Sunni Muslim, imposed a state of emergency to quell one month of unrest between members of the Shiite majority and the Sunni minority. The Bahrain Human Rights Society said on its website April 13 that at least 31 people were killed during the protests.

The king has announced plans to start a national dialogue from July 1. Parliamentary Chairman Khalifa bin Ahmed Al Dhahrani will lead the discussions, Bahrain News Agency reported on June 11, citing a Royal Order.

Standard & Poor’s cut Bahrain’s credit rating for a second time this year on March 18 to BBB, the second-lowest investment grade, after reducing it to A- from A on February 21. Moody’s Investors Service lowered its assessment twice this year, taking the ranking to Baa1, three levels above junk.

Central bank Governor Rasheed Al Maraj said in an interview from Manama June 16 that the downgrades were “uncalled for,” pointing out that economic growth will pick up in the second half of the year following the approval of a two-year budget.

Average yields on Islamic bonds in the GCC, which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, declined 105 basis points this quarter to 4.23 percent on June 17, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The rate reached 4.16 percent on June 6, the lowest level since June 2005.

The yield on Dubai’s 6.396 percent dollar Islamic debt maturing in November 2014 fell 66 basis points this quarter to 4.87 percent on June 17 and touched a record low 4.59 percent on June 1, data compiled by Bloomberg show.

Cheaper funding costs prompted companies including the United Arab Emirates’ Sharjah Islamic Bank and HSBC Bank Middle East Ltd., a unit of Europe’s biggest bank, to sell sukuk last month. Albaraka Banking Group may auction $300m of Shariah notes in September once confidence in the region is restored, chief executive officer Adnan Ahmed Yousif reiterated in a June 1 interview, after announcing in March the company was postponing the sale from April.

Global sales of sukuk, which pay asset returns to comply with Islam’s ban on interest, rose 44 percent this year to $9.1bn from a year earlier, according to data compiled by Bloomberg.

The difference between the average yield for sukuk and the London interbank offered rate narrowed 22 basis points this quarter to 242 on June 17, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

Shariah-compliant bonds gained 5.4 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in developing markets rose 4.2 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The extra yield investors demand to hold the Bahrain sukuk over Malaysia’s 3.928 percent dollar note shrank this quarter. The difference narrowed to 41 basis points on June 17 from 110 on March 31, according to data compiled by Bloomberg. The gap between Malaysia’s security and the Dubai Department of Finance’s 6.396 percent debt due in November 2014 was 251, compared with 272 at the end of March, Bloomberg data show.

The Bloomberg Malaysian Sukuk Ex-MYR Index, which tracks government and corporate foreign-currency bonds listed in Malaysia, rose to 103.482 on June 17. The gauge climbed 2.6 percent this quarter and reached 103.56 on June 9, the highest level since it was created in November.

Bahrain’s low sukuk yields and concern that political unrest isn’t over makes the credit less attractive, Esther Teo of Kuala Lumpur-based HwangDBS Investment Management Bhd., said in a June 15 interview.

“We bought the Bahrain sukuk in March when it was attractive,” said Teo, who helps oversee about $3bn of Islamic and non-Islamic funds. “We have sold out already. The rate is quite low at the moment so I don’t think I’ll buy now.”

Yields on Bahrain’s sukuk and the cost to protect the country’s debt from default are returning to pre-crisis levels. The rate on the Islamic bonds was 2.4 percent on January 19, almost a month before the demonstrations started on February 14.

Five-year credit-default swaps dropped to 231 basis points on June 17 from the year’s high of 359 on March 15, compared with 178 on Jan. 19, according to data compiled by CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

“This is a reflection of the market confidence in Bahrain,” the central bank’s Al Maraj said. “The cuts probably were not warranted in the first place.

“Investors are buying Bahrain’s sukuk on the back of improved sentiment following the gradual return to relative stability,” Malek Khodr Temsah, assistant vice president of treasury and investment at Albaraka Banking in Manama, said in an interview on June 15.

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