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.
Sales of Islamic bonds from issuers in the six-nation GCC, including the UAE and Bahrain, dropped 32 percent to $4.5bn in 2010, the least since 2005, after debt restructurings, defaults and tumbling property prices hurt investors’ confidence.
“Despite a slowdown in issuance regionally, we remain buyers of the stronger credits in GCC sukuk, preferring those still trading at sub-par levels,” John Bates, head of fixed income at Silk Invest Ltd, a London-based fund that specialises in frontier markets, said in an e-mailed response January 6.
The spread between the average yield for Gulf Cooperation Council sukuk and the London interbank offered rate shrank eleven basis points to 351 last week, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The extra yield investors demand to hold developing nation debt rather than US Treasuries narrowed 9.4 basis points to 239 in the same period, according to JPMorgan Chase EMBI+ indexes.
Debt in emerging markets gained 12.2 percent last year, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.
Rising global interest rates this year will cause sukuk returns to drop, according to Mashreq Capital DIFC.
“Interest rates will eat into returns particularly in the second half of the year,” said Abdul Kadir Hussain, who manages $2bn of assets as chief executive of Mashreq Capital, said in a e-mail response on January 5. “A lot of the run up has already taken place.”
Dubai World’s agreement with creditors in October reduced the risk that the company will default, bolstering investor appetite for higher-yielding Islamic debt. Economic growth in the will accelerate to 3.2 percent this year, from 2.4 percent in 2010, the International Monetary Fund said in its October World Economic Outlook report. The US will grow 2.3 percent and the euro region 1.5 percent, according to the Washington-based fund.
“The first half of 2011 should be supportive of risky assets, and we will see good demand for riskier credits like Dubai,” Sergey Dergachev, who helps manage the equivalent of $8.5bn in emerging-market debt at Union Investment in Frankfurt, said in an e-mailed response to questions January 6. The second half “will be a tough environment for riskier credits. Everything depends on the situation in the US, Treasury moves and the situation in the euro zone,” he said.
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