Bahrain sukuk beat Dubai as emergency lifted

Rally in Bahrain's Islamic bonds may help restore confidence, revive issuance from Arabian Gulf
By Bloomberg
Sun 19 Jun 2011 04:26 PM

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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