Dubai sukuk 'massive' rally ruled out by Citi

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ISLAMIC FINANCE: Global sales of sukuk fell 22 percent to $10.5bn this year, according to data compiled by Bloomberg. (Getty Images)

ISLAMIC FINANCE: Global sales of sukuk fell 22 percent to $10.5bn this year, according to data compiled by Bloomberg. (Getty Images)

Dubai’s Islamic bonds, which have beaten sukuk from Malaysia this quarter, face limited gains because the restructuring of Dubai World’s $24.9bn in debt requires asset sales over eight years.

“I don’t think there will be a runaway rally here,” Abdul Kadir Hussain, chief executive in Dubai at Mashreq Capital DIFC Ltd, which manages $2bn of mainly Persian Gulf assets, said in an interview on Monday. “Refinancing risk will occur in five and eight years obviously and the market will continue to see this.”

The yield on the Dubai Department of Finance’s 6.396 percent Islamic debt due in 2014 dropped 15 basis points to 6.42 percent on Monday, after falling by six on Sept 10.

The notes returned 5.9 percent this quarter, compared with 3.8 percent for Malaysia’s 3.928 percent sukuk due June 2015, according to data compiled by Bloomberg.

Dubai World said Sept 10 it won approval from 99 percent of its creditors to delay payments after receiving a $20bn bailout from Abu Dhabi in 2009.

The company’s ability to make “principal repayments in five years and eight years” will depend on asset sales, John Tofarides, an analyst at Moody’s Investors Service, wrote in a report on Monday.

An official for Dubai World, one of three main state-owned holding companies, who said he couldn’t be identified because of company policy, declined to comment.

Dubai World and its main creditor banks agreed in May to restructure $14.4bn of loans and $8.9bn of government liabilities.

The company said banks would be paid $4.4bn in five years and another $10bn over eight years at below-market interest rates supported by assets sales.

Dubai World may raise as much as $19.4bn in eight years by selling assets, a person with knowledge of the matter said on Aug 25. The company probably would raise $10.4bn if it sold those assets now, the person said.

“A refinancing risk could occur in five years and eight years, depending on the level of Dubai World’s future revenues and assuming no additional external support,” Tofarides at Moody’s wrote.

Dubai’s economy will shrink about 0.5 percent this year, the International Monetary Fund said in May, after property prices plummeted from their peak in 2008.

The United Arab Emirates will expand 1.3 percent this year, after a contraction of 0.7 percent in 2009, the IMF said in April.

The 6.3 percent average yield on Islamic notes sold by Persian Gulf borrowers, based on the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index, compares with 5.12 percent for the broader dollar sukuk index, which consists of bonds from the Persian Gulf to Southeast Asia and the US.

Both indexes fell more than 100 basis points, or 1 percentage point, since June 30.

The yield gap between the Dubai government 2014 sukuk and Malaysia’s 2015 note has narrowed 35 basis points to 356 in the past week, according to Royal Bank of Scotland Group Plc prices.

“Investors have already been re-pricing sukuk risk over the last month or so, as prospects of a Dubai World restructuring deal improved,” Luis Costa, an emerging markets debt strategist at Citigroup Inc in London, said on Monday. “The confirmation of the deal is supportive, but it will probably not unravel a massive rally.”

The yield on the 2.75 percent $750m of Islamic notes due in January 2011 from Dubai World’s property unit Nakheel PJSC was at 11.41 percent on Monday.

It has fallen from 86 percent on March 24, the day before Dubai’s government said it would support the company with $9.5bn, according to prices compiled by Bloomberg.

Nakheel, a builder of palm-shaped islands off Dubai’s coast and a unit of Dubai World, on July 14 won “unanimous support” from creditors to renegotiate terms on $10.5bn of debt.

The company said in April 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 Dubai World agreement also “marks the support of creditors to the separation” of Nakheel from the holding company, Sheikh Ahmed Bin Saeed Al Maktoum, chairman of the Dubai Supreme Fiscal Committee, said Sept 10.

Global sales of sukuk fell 22 percent to $10.5bn this year, according to data compiled by Bloomberg. Issuance totaled $20.2bn last year, up from $14.1bn in 2008.

“I expect it to pick up in the fourth quarter,” Mashreq’s Hussain said. “Some of these issues in Dubai are being sorted out and there is a need for capital from both Sharia-compliant and conventional companies.” (Bloomberg)

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