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Sat 29 Jan 2011 04:01 PM

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Banks predict record $31bn sukuk in 2011

Global sales of Islamic bonds may match the 2007 record as issuers rush to benefit from low borrowing costs

Banks predict record $31bn sukuk in 2011
SHARP RISE: Bloomberg data show Islamic debt sales increased 62 percent to $10.6bn in the second half of 2010 compared with the first six months

Global sales of Islamic bonds may match the 2007 record as issuers rush to benefit from low borrowing costs before economic growth pushes yields higher, Maybank Investment Bank and CIMB Islamic Bank say.

Islamic debt sales increased 62 percent to $10.6bn in the second half of 2010 compared with the first six months, according to data compiled by Bloomberg. The yield on global sukuk was 4.6 percent on Thursday, climbing 18 basis points from a five-year low of 4.4 percent on Nov 8, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows.

Borrowing costs are still less than a third of the record 14.8 percent reached in February 2009 as debt restructuring in the Arabian Gulf and government spending plans helped restore appetite for the debt. Issuance is recovering after Dubai World, one of three main state owned holding companies, reached an agreement with most of its creditors to restructure $24.9bn of debt in September.

“It’s possible” for global sales to reach 2007 levels of $31bn after $17.1bn last year, Tengku Zafrul Tengku Abdul Aziz, chief executive officer of Maybank Investment, last year’s second-biggest sukuk arranger, said in a phone interview from Kuala Lumpur on Thursday. “The pipeline is as strong as the last six months of 2010.”

Saudi Arabia, the world’s biggest oil exporter, approved in August a five-year, $384bn development plan focusing on education, housing and transportation. A Malaysian government 10-year private-led project initiative, including a nuclear power plant and an underground rail network, will spur sales of Shariah-compliant debt this year, Prime Minister Najib Razak said in an Oct 25 speech in Kuala Lumpur.

There is “demand for financing arising from large infrastructure development planned in Malaysia as well as the Gulf Cooperation Council”, Badlisyah Abdul Ghani, Kuala Lumpur- based chief executive officer at CIMB Islamic, a unit of 2010’s top sukuk arranger CIMB Group Holdings Bhd., said in an emailed response Jan 25.

Global Shariah compliant bonds returned 12.8 percent last year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in emerging markets gained 12.2 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.

The yield on Dubai’s 6.396 percent sukuk maturing in November 2014 fell two basis points to 6.25 percent on Friday, according to Bloomberg prices. It has dropped 23 basis points this year. The extra yield investors demand to hold Dubai’s government debt rather than Malaysia’s narrowed 2 basis points this year, or 0.027 percentage point, to 336, the data show.

“There will be more demand from international investors to see sukuk that are based in the Gulf region just on the basis that they may offer higher yield” than in Malaysia, Ahmed Talhaoui, the Abu Dhabi-based head of investment at Royal Capital, 44 percent owned by United Gulf Bank, an investment bank in Bahrain, said in a phone interview Jan 25.

Non-Shariah compliant issuers may not see enough incentive to sell sukuk, lowering the potential number of Islamic bond sales this year, Khalid Howladar, a Dubai-based senior credit officer at Moody’s Investors Service, said in an emailed response to questions on Jan 24. He doesn’t expect sukuk sales to reach a record.

“It’s still a relatively stressed funding environment and I think simplicity is important,” he said. “Sukuk and their associated issues are relatively complex.”

Corporates and government related entities in Saudi Arabia may sell the most sukuk this year followed by Malaysia and the UAE, Tariq Al Rifai, director of Islamic Market Indexes in Dubai for Dow Jones Indexes, part of a joint venture 90 percent owned by CME Group and 10 percent by News Corp’s Dow Jones & Co, said in an interview on Jan 16.

Saudi International Petrochemical Co, known as Sipchem, will sell as much as $533m worth of Islamic bonds, the company said in a statement on Dec 14. Pengurusan Aset, the state owned company in charge of Malaysia’s water services industry, sold $883m of Islamic bonds, said a person on Thursday with direct knowledge of the matter who asked not to be identified because the information is private.

Islamic bond sales will “certainly” reach 2007 levels as borrowers seek to sell ahead of rising yields, Nida Raza, senior vice president of capital markets at Bahrain’s Unicorn Investment Bank, said in a telephone interview on Jan 24. “Chances are the treasury curve from the front end, the five- year onwards, is going to start creeping up. So the coupon levels for issuers might start going up as well.”

The yield on the benchmark five-year Treasury bill maturing in 2015 has risen 12 basis points to 1.9 percent since reaching a low for 2011 on Jan 14.

Economic growth in the US may accelerate to 3 percent this year from 2.8 percent in 2010, while Middle East and North African economies may grow 4.6 percent from 3.9 percent, according to the International Monetary Fund’s World Economic Outlook Update released on Thursday.

“We are going to see a rush this year to issue,” Dow Jones’ Al Rifai said. “People are still uncertain if economies will rise. What they do know is that rates are low, and the likelihood that rates will go any lower is minimal.”