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Mon 21 Mar 2011 11:11 AM

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Arabian Gulf companies plan sukuk as cost rises

Political conflict in Middle East to make it more expensive for firms in Arabian Gulf to issue Islamic bonds

Arabian Gulf companies plan sukuk as cost rises
Sharia, Sharia compliance, sukuk, Islamic finance

The political conflict in the Middle
East will make it more expensive for companies in the Arabian Gulf such as
First Gulf Bank and Masraf Al Rayan to issue Islamic bonds as relative yields
hold near the highest level in more than three months.

First Gulf, controlled by Abu
Dhabi’s ruling family, plans to sell bonds or sukuk this year, chief executive officer
Andre Sayegh said on March 14. Masraf, Qatar’s second-largest Islamic bank,
said March 15 it will seek shareholder approval to issue as much as $1bn of
Shariah-compliant debt. The difference between the average yield for Gulf
Cooperation Council sukuk and the London interbank offered rate has widened 65
basis points, or 0.65 percentage point, to 401 since Jan. 25 when the uprising
erupted in Egypt, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows.

NBP Fullerton Asset Management and
CIMB-Principal Islamic Asset Management said they would consider buying sukuk
from the Gulf should yields climb to compensate for rising risk and if the
issuers are backed by governments. Emaar Properties, builder of the tallest
tower in Dubai, and Gulf Investment Corp., the investment company owned by the
six GCC states, have sold a combined $697m from the region so far this year,
according to data compiled by Bloomberg.

“Government-backed sukuk will be
more in demand, especially from the oil-producing countries,” Sajjad Anwar, who
helps manage the equivalent of $190 million at Karachi-based NBP Fullerton, a
unit of the nation’s biggest lender National Bank of Pakistan, said in a March
18 interview. “Other sukuk may also be taken up by some investors depending on
how attractive the yields are.”

Sharjah Islamic Bank of the UAE plans to sell as much as $500m of debt that complies with the
religion’s ban on interest in the second quarter to fund expansion. The bank
hired HSBC Holdings and Standard Chartered Plc to manage the offering, the
company said in a statement March 16.

Jeddah, Saudi Arabia-based Bank
Al-Jazira hired the local units of HSBC and JPMorgan Chase & Co. to sell
riyal-denominated sukuk, the lender said March 15.

First Gulf Bank, the fourth-biggest
by assets in the UAE, is rated A2 by Moody’s Investors Service, the sixth-best
investment grade rating. Moody’s rates Doha-based Masraf, which is planning a
euro medium-term sukuk program, A3, the seventh- highest.

“I am looking for good quality
sukuk, sovereign, quasi sovereign rated sukuk to invest in,” Noripah Kamso,
chief executive officer of Kuala Lumpur-based CIMB-Principal Islamic Asset
Management Sdn. Bhd., a unit of CIMB Group Holdings Bhd., the world’s biggest
sukuk arranger, said in an interview March 18. “If it is the UAE, we will
probably consider buying as that is the most stable among the Middle Eastern
block of countries.”

Officials from the oil-rich emirate
of Abu Dhabi met fixed- income investors in Asia this month to brief them on
the sheikhdom’s economy and budget, a government official said March 9.
Standard Chartered is arranging the sit-downs, which aren’t related to an
immediate transaction, according to the official.

More than two months of unrest
across the Middle East and North Africa led to the ouster of the Egyptian and
Tunisian presidents, a civil war in Libya, deadly clashes in Yemen and Bahrain,
and prompted Saudi Arabia’s King Abdullah to boost spending by $103bn. Bahrain’s
government declared a three- month state of emergency March 15.

Investors would still prefer
Malaysian bonds over the Middle East on “the back of the ongoing unrest in
Bahrain and Libya”,” said Jamzidi Khalid, chief executive officer at Deutsche
Bank International Islamic Banking, the Islamic finance unit of Deutsche Bank,
in an interview in Kuala Lumpur March 17. “There’s just a general flight to

Last month’s selloff drove the
average yield on Shariah- compliant debt in the six-member GCC up 46 basis
points to a five-month high of 6.05 percent on Feb. 28, according to the
HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. It was little changed last week at
5.88 percent on March 18.

The yield on Dubai government’s
6.396 percent dollar sukuk maturing in November 2014 dropped 7 basis points
last week to 6.16 percent March 18, the lowest since January 18, according to
data compiled by Bloomberg. The rate reached an almost eight- week high of 6.65
percent January 31. The difference in yields between Malaysia’s sukuk and the
Dubai note widened 5 basis points to 347 last week, the data show.

The Bloomberg-AIBIM-Bursa Malaysia
Sovereign Shariah Index, which tracks nine of the most-traded
ringgit-denominated government securities, was unchanged at 101.756 March 18.
The gauge has gained 0.2 percent this month.

Gulf sukuk returned 0.8 percent this
month, HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows. Debt in developing
markets gained 0.9 percent, according to JPMorgan’s EMBI Global Diversified

Albaraka Banking Group BSC,
Bahrain’s biggest publicly traded lender, will seek shareholder approval March
23 to sell $300m of Islamic bonds. The bank reduced the size of the offering
from as much as $500m, chief executive officer Adnan Yousif said February 8.
The bank, rated the lowest investment grade of BBB- by Standard & Poor’s,
may have its ranking cut to junk, S&P said Febuary 22.

“Issuers have stayed clear of the
market because of the turmoil in the region, but this is just a deferral,”
Dubai- based Samad Sirohey, chief executive officer of New York-based Citigroup
Inc.’s Islamic unit, said in an interview March 16. “Companies have got funding
to do, and they cannot wait forever.”