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Mon 25 Oct 2010 08:01 PM

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Citigroup sees sukuk demand recovery in a year

Bank expects to see 'pre-crisis' levels of regional and international interest in Islamic debt by Q3 2011

Citigroup sees sukuk demand recovery in a year
CITI VIEWS: Citigroup feels investors are willing to take risk with sukuks as they see higher yields (Getty Images).

According to Citigroup, demand for Islamic bonds from the Middle East will return to “pre-crisis” levels by the end of the third quarter as companies restructure debt and higher yields lure investors.

In a telephonic interview on October 20, Samad Sirohey, Dubai based chief executive officer of Citi Islamic Investment Bank, said: “The yields offered here are high, and investors globally are willing to take the risk of investing here to get that spread and return.” 

He added: “We should see pre-crisis levels of regional and international interest in Islamic debt from the Middle East by the third quarter of 2011.”

The average yield on sukuk sold by Gulf Cooperation Council issuers rose 20 basis points, or 0.2 percentage point, last week to 5.8 percent, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index.

Global sales of sukuk have declined 24 percent this year to $12 billion after reaching a record $31 billion in 2007 before the collapse of credit markets drove investors away from all but the safest government securities, according to data compiled by Bloomberg.

Shariah compliant bond sales from the Arabian Gulf are rising after Dubai World, the state owned holding company, reached an agreement with 99 percent of its creditors in September to change terms on $24.9 billion of debt.

Economic growth in the Middle East and North Africa will accelerate to 5 percent in 2011 from 3.8 percent this year and 1.1 percent in 2009, the IMF said yesterday.

Islamic notes sold by Arabian Gulf issuers have returned 12.6 percent this year, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index.

Emerging market sukuk returned 11.9 percent, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

Debt in developing markets gained 15.9 percent, JPMorgan Chase & Co’s EMBI Global Diversified Index shows.

Companies in the Gulf have sold $1.25 billion of sukuk since Dubai World’s announcement, bringing this year’s total to $3.7 billion, according to data compiled by Bloomberg.

Islamic Development Bank, a Jeddah based lender, sold $500 million of five year sukuk on October 20 to yield 40 basis points more than the benchmark midswap rate.

Qatar Islamic Bank SAQ, the nation’s biggest Shariah compliant lender, sold $750 million of similar maturity debt on September 30, and received $6 billion of orders.

The Dubai Department of Finance is proposing launching a multicurrency sukuk program, Malaysia’s Prime Minister Najib Razak said today in Kuala Lumpur, without providing details.

Sirohey, who has led the Manama, Bahrain based Islamic unit of Citigroup, since 2008: “We see a trend that supports the fact that liquidity in the bank market, particularly the Islamic bank market, should return.”

He added: “The conclusion of the Dubai World restructuring certainly helps investor sentiment.”

Citigroup ranked 13th among 31 Islamic bond underwriters this year, arranging $209 million of the notes, or 1.7 percent of the total $12 billion, according to data compiled by Bloomberg.

The bank had a market share of 3.1 percent last year.

Abu Dhabi Islamic Bank, the UAE’s second biggest Shariah compliant lender, started meeting investors last week to sell bonds that comply with religious principles.

ADIB has a $5 billion sukuk trust certificate program, according to a July 8 prospectus posted on the London Stock Exchange’s website.

Global investors are buying debt sold by Brazil, Russia, India and China rather than the Middle East, according to Royal Capital, which is 44 percent owned by United Gulf Bank, an investment bank in Bahrain.

Defaults by companies in the Gulf have increased concern about risks associated with Islamic bonds.

International Investment Group, an Islamic financial company based in Safat, Kuwait, said July 26 it was unable to pay $152.5 million to bondholders who demanded immediate repayment after it defaulted on a $200 million sukuk.

Dubai International Capital, an investment company owned by Dubai’s ruler, plans to restructure its business by the end of the year, chief investment officer David Smoot said October 18.

In an emailed response on October 23, Ahmed Talhaoui, the head of portfolio management at Royal Capital, said: “The resolution of the Dubai debt restructuring, the potential consolidation of banks or stock exchanges in the region, and the enforcement of stricter corporate governance can help in encouraging these investors to invest locally.”

The extra yield investors demand to hold Dubai’s dollar sukuk rather than Malaysia’s widened 14.6 basis points this month to 387.

The yield on Dubai’s 6.396 percent sukuk maturing in November 2014 fell 2 basis points to 6.36 percent today, according to data compiled by Bloomberg.

The difference between average yields for Gulf sukuk over the London interbank offered rate narrowed 17 basis points to 464 on October 22, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index, which tracks 19 corporate and sovereign bonds.

The spread on bonds in developing economies over US Treasuries narrowed nine basis points to 257 last week, according to the JPMorgan Chase & Co EMBI+ Index.

In a telephonic interview yesterday, Rami Sidani, the Dubai based head of Middle East and North Africa investment at Schroder Investment Management Ltd, which oversees about $230 billion worldwide said: “People are willing to buy more risky assets relative to, let’s say, the Treasury bills in the US, which are yielding practically nothing at the moment.”

He added: “The surge in regional bond issuances and the magnitude of the oversubscription of the debt sales are the biggest proof of the strong demand for such investment instruments.”


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