Dubai World deal reduced default risk, bolstering investor appetite for higher-yielding Islamic debt
Islamic bonds from the United Arab Emirates are poised to extend gains after climbing to a record last week, buoyed by progress in debt restructuring and a pickup in appetite for high-yielding assets in the Arabian Gulf.
The HSBC/NASDAQ Dubai UAE US Dollar Sukuk Index, which tracks ten sovereign and corporate securities, climbed to 131.15 on January 4, the highest since HSBC started tracking their performance in January 2005. The notes returned 16.5 percent last year after a gain of 23 percent in 2009, the index shows. Sharia-compliant debt sold by Dubai issuers will gain between six percent and seven percent in 2011, outpacing counterparts in the Arabian Gulf, according to Dubai-based Mashreq Capital DIFC Ltd.
Dubai World, one of Dubai’s three main state-owned holding companies, received approval from its creditors in October to change terms on $24.9bn of loans. Nakheel PJSC, a property unit of Dubai World seeking to delay payments on at least $10.5bn of debt, said December 30 it received funds from the Dubai government to repay Islamic bonds maturing this month.
“Risk appetite is back in fashion for 2011,” said Usman Ahmed, senior fixed-income fund manager at Emirates NBD Asset Management, which oversees $300m in bonds at the unit of the UAE’s biggest lender, said in an e-mailed response to questions January 5. “That should bode well for Dubai and UAE sukuk, which are considerably higher yielding.”
The yield on Dubai’s 6.396 percent sukuk maturing in November 2014 rose four basis points to 6.32 percent Jan 7, according to Bloomberg data. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s narrowed four basis points last week to 334, data compiled by Bloomberg show.
DP World’s 6.25 percent sukuk due July 2017 returned 23 percent last year, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. Nakheel’s 2.75 percent Islamic notes due in January 2011 gained 94.8 percent last year, according to prices compiled by Bloomberg.
Nakheel said it had received money from the Dubai Financial Support Fund to pay $816.3m in principal and $10.3m in profit on the 2.75 percent sukuk due January 16. Bondholders will also receive an additional payment of $45m .
The developer said December 29 it reached an agreement with 91 percent of its trade creditors as it seeks to delay payments on at least $10.5bn of loans and bills. It is attempting to gain clearance from creditors holding 95 percent of the debt by the end of March, according to an e-mailed statement on January 2.