Abu Dhabi’s narrowing yield gap may aid sukuk

Abu Dhabi may sell $1.5bn in bonds this year, its first international securities since April 2009
Abu Dhabi’s narrowing yield gap may aid sukuk
SHARIA FINANCE Sales of Islamic bonds from the GCC have reached $697m from $450m in the same period last year, according to data compiled by Bloomberg (ITP Images)
By Bloomberg
Mon 14 Mar 2011 10:54 AM

The oil-rich Persian Gulf emirate of Abu Dhabi may find it cheaper to borrow with Islamic bonds than non-Sharia compliant securities, National Bank of Abu Dhabi PJSC and EFG-Hermes UAE Ltd say.

The yield on the emirate’s 5.5 percent dollar-denominated non-Islamic note due April 2014 fell 3 basis points, or 0.03 percentage point, last week to 2.32 percent on March 11, the lowest in a month on speculation the United Arab Emirates will be spared from protests that toppled the governments of Egypt and Tunisia. By contrast, the yield on neighbouring Dubai’s 6.396 percent sukuk maturing in November 2014 was at 6.23 percent, data compiled by Bloomberg show.

Abu Dhabi, the richest of the seven sheikhdoms that make up the UAE, may sell $1.5bn in bonds this year, its first international securities since April 2009, to create a longer maturity benchmark, Standard Chartered Plc said in a March 7 report. The government will meet investors in Asia from today to brief them on the emirate’s economy and budget, an official said March 9.

“For a high-quality name to come out with a sukuk it is quite a rarity, so I expect acceptance would be exceptionally good,” Mark Watts, head of fixed-income at National Bank of Abu Dhabi’s asset management group, said in a telephone interview March 11. “It’s entirely possible to see an Abu Dhabi government sukuk issue coming at lower yields than a similar conventional issue. As investors in a sukuk market, we would welcome the opportunity to buy Abu Dhabi government.”

Abu Dhabi government officials will meet fixed-income investors in Beijing, Hong Kong and Singapore, the government official said on condition of anonymity. Standard Chartered is arranging the meetings and the sit-downs with investors aren’t related to an immediate transaction, according to the official.

The meetings in Asia follow those held in Europe and the US last year.

The emirate last sold bonds in April 2009, when it raised $3bn from five-year and ten-year securities. The 2014 bonds yielded 116 basis points, or 1.16 percentage points, more than similar-maturity Treasuries March 11, compared with 400 when the notes were priced. The gap reached this year’s low of 86 basis points February 11.

“A sukuk would tend to come tighter as demand could be higher,” said Dubai-based Rawad Hakme, a portfolio manager at EFG-Hermes UAE, a part of Egypt’s largest publicly traded investment bank, said in an e-mailed response to questions March 10. “A sukuk issue would cater to both sukuk and conventional players while conventional issue would only cater for non- Islamic buyers.”

The Cairo-based bank has $2.5bn of fixed-income assets under management in the Middle East and North Africa.

Abu Dhabi is rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s, the third-highest investment grade rankings. Qatar’s 4 percent dollar bond maturing in January 2015, similarly rated by Moody’s and S&P, yielded 3.16 percent March 11. The debt offers a 168 basis-point rate advantage over Treasuries.

More than two months of protests have rocked the Middle East and North Africa as citizens demand civil rights, better living standards and the ouster of entrenched regimes. The six- member Gulf Cooperation Council plans to provide Oman and Bahrain with $10bn each over a decade, UAE Foreign Minister Sheikh Abdullah Bin Zayed Al Nahyan said March 10. The aid is aimed at developing infrastructure and housing, Bahraini Foreign Minister Sheikh Khalid bin Ahmed Al Khalifa said on his Twitter account.

Demand for any bonds offered by Abu Dhabi “will probably be less then would have been if it were not for the mini-crisis in the region,” Jim McCormick, the London-based head of fixed- income research for Europe, Middle East and Africa at Nomura Holdings Inc said in an interview in Dubai March 10.

The average yield on Sharia-compliant debt in the GCC gained 2 basis points to 5.88 percent March 11, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The unrest that spread to Bahrain, Libya, Yemen and Oman drove yields to a five-month high of 6.05 percent February 28.

The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s widened 7 basis points to 342 on March 11. Gulf sukuk returned 0.7 percent so far this month, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index, while bonds in emerging markets gained 0.8 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

Sales of Islamic bonds from the GCC have reached $697m from $450m in the same period last year, according to data compiled by Bloomberg. Ras Al Khaimah, another emirate in the UAE, raised $400m from the sale of Islamic bonds in December.

Abu Dhabi, home to one of the world’s largest sovereign wealth funds, plans to spend $500bn on industry and tourism by 2030. The UAE economy will expand 3.25 percent this year, the International Monetary Fund said March 7, from 2.4 percent in 2010.

“Given the significant infrastructure projects Abu Dhabi is undertaking, an Ijara-based sukuk might be an interesting option,” Emad Mostaque, Middle East and North Africa strategist at Mumbai-based Religare Capital Markets said March 9. “A conventional issue would go further to helping them create a yield curve and actually having some monetary tools, but if they want cash, there may be more demand for Islamic ironically, given the dearth of quality Islamic bonds out there.”

Islamic debt with real estate as the underlying asset is known as Ijarah, or a sale and lease agreement.

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