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Thu 24 Jun 2010 04:45 PM

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Dubai bailout boosts demand for Gulf’s sukuk

'There is... pent-up demand for decent quality sukuk issuance' - Mashreq Capital.

Dubai bailout boosts demand for Gulf’s sukuk
DEEP DROP: Global sales of Islamic bonds have fallen 24 percent to $6.5bn so far in 2010 from the same period last year. (Getty Images)

Investor demand for Islamic bond offerings in the Gulf is strengthening following last month’s proposed restructuring of Dubai World’s $23.5bn of debt, Mashreq Capital DIFC Ltd said.

The Dubai Department of Finance’s 6.396 percent sukuk maturing in November 2014 has dropped 271 basis points, or 2.71 percentage point, to 7.58 percent since reaching this year’s high of 10.29 percent on Feb. 15, according to Bloomberg bond trader composite prices. The securities’ spread over similar- maturity US Treasuries narrowed 220 to 591 in the same period.

Dubai World, one of the UAE's three biggest state-owned business groups, said on May 20 it reached an agreement with its main creditor group to restructure its liabilities, ending a debt crisis that roiled global markets at the end of last year.

Qatar Islamic Bank and Qatari Diar Real Estate Investment Co. are planning to sell about $2.25bn of bonds in coming months.

“There is quite a bit of pent-up demand for decent quality sukuk issuance,” said Abdul Kadir Hussain, chief executive officer at Mashreq Capital, which manages $2bn of mainly Gulf assets. “People were waiting to see how the restructuring of Dubai World was going to pan out.”

Shariah-compliant bonds have weathered the European debt crisis better than notes in emerging markets, the U.S. and Europe. Islamic bonds returned 9.5 percent so far this year, according to the HSBC/NASDAQ Dubai Listed US Dollar Sukuk Index, while regular debt in developing markets gained 5.6 percent, JPMorgan Chase’s EMBI Global Diversified Index shows.

Global sales of Islamic bonds have fallen 24 percent to $6.5bn so far in 2010 from the same period last year, according to data compiled by Bloomberg. Sukuk issuances rose to $20.2bn in 2009 from $14.1bn in 2008, the data show.

Gulf issuers raised $2.47bn from sukuk sales since the end of 2009, about 13 percent less than during the same period of last year, Bloomberg data show.

“The recent lull in issuance is because of the overall Gulf Arab situation, particularly surrounding Dubai,” said Hussain. “We’re just starting to come out of that time, starting to see that there’s an appetite for the region.”

Qatar Islamic Bank, the Gulf state’s biggest Shariah- compliant lender, plans to sell as much as $750 million of bonds in its first Islamic debt offering, Chief Executive Officer Salah Mohammed Jaidah said on May 19. Qatari Diar may raise about $1.5bn by selling global bonds backed by Qatar, the world’s biggest exporter of liquefied natural gas, a person familiar with the sale plan said on May 12.

Islamic finance transactions are based on the exchange of assets rather than interest to comply with Shariah principles. Created in the 1970s, the Islamic finance industry’s assets may quadruple to $2.8 trillion by 2015 from about $700 billion in 2005, according to the Kuala Lumpur-based Islamic Financial Services Board.

Countries including Jordan and Indonesia are planning sales this year. Jordan’s Finance Minister Mohammad Abu Hammour said June 23 the government is in discussions with a number of banks to help sell about $500 million of bonds internationally.

Indonesia plans to sell as much as $650 million of Islamic bonds in October, after scaling back and delaying an original proposal to raise $750 million in July, Dahlan Siamat, the ministry’s director of Islamic financing, said on June 15.

Malaysia, the world’s largest sukuk market, raised $1.25bn selling five-year Ijarah sukuk last month after drawing bids for more than five times the $1bn originally offered.

The yield on the 3.928 percent Islamic notes due June 2015 was 3.57 percent today, 36 basis points less than when they were sold on May 27, according to prices from Royal Bank of Scotland Group Plc. The difference over similar-maturity U.S. Treasuries has narrowed 5 basis points to 175.

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