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Wed 23 Mar 2011 05:04 PM

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Dubai's sukuk head for best rally in one year

Yields on Dubai's Islamic bonds dropped to a record low after Dubai World signed off on its debt accord

Dubai's sukuk head for best rally in one year
Sharia, Sharia compliance, sukuk, Islamic finance

Yields on Dubai’s Islamic bonds
dropped to a record low after Dubai World signed off on its debt accord and
speculation grows that the UAE will be spared unrest.

The rate on Dubai’s 6.396 percent
dollar sukuk due in November 2014 fell 91 basis points so far in March, headed
for the biggest monthly drop in a year, to 5.6 percent on Wednesday, data
compiled by Bloomberg show. Yields on Bahrain’s 6.247 percent five-year sukuk
due in June 2014 climbed 29 basis points in the same period to 4.1 percent as
protests intensified in the country after revolts toppled regimes in Egypt and

Dubai’s Islamic notes gained even as
a coalition of countries including the US, the U.K. and Qatar attacked positions
of fighters loyal to Libyan leader Muammar Qaddafi. Dubai World, the
state-owned holding company that sought to alter the terms on $24.9bn of debt,
signed a final agreement with creditors on Wednesday, marking the end of a
restructuring that roiled global markets in 2009.

“As the Dubai World restructuring is
drawing to a close, investors are getting more comfortable and increasingly
willing to take Dubai risk,” Louis Najem, a fixed-income sales trader in Dubai
at Rasmala Investment Bank Ltd, said in an e-mailed response to questions on
Tuesday. “Dubai in particular has very attractive yields, and currently carries
less risk than the other Middle East and North African markets.”

Average yields on Persian Gulf sukuk
were little changed at 5.84 percent on Tuesday, according to the HSBC/NASDAQ Dubai
GCC US Dollar Sukuk Index. The extra yield investors demand to hold the debt
over the London interbank offered rate was at 390.6 basis points.

The UAE, Qatar and Kuwait are the
only countries in the Gulf Cooperation Council to have been spared unrest.
Protests in Saudi Arabia, the Arab world’s largest economy, prompted King
Abdullah to boost spending by about $129bn, including $67bn for housing. The
Bahraini government declared a three- month state of emergency March 15.

Yemen’s President Ali Abdullah Saleh
said defecting generals risk dragging the country into a “bloody civil war,” on
Tuesday. Allied forces are expanding their air campaign over Libya in a bid to
thwart Qaddafi’s fighters.

“Libya has not had a huge impact,”
on Dubai’s debt, Abdul Kadir Hussain, who helps oversee $2 billion in
fixed-income assets as chief executive officer at Mashreq Capital in Dubai,
said in an email March 20. “The aggressive fiscal action taken by the Saudis,
and with Bahrain seeming to become less confrontational, I think buyers have
outnumbered sellers in this region.”

Dubai’s economy, the second-biggest
of seven that make up the UAE, is recovering from the credit crisis, helped by
a revival in trade and tourism. Real gross domestic product expanded 2.2
percent in 2010 from a year earlier, the statistics bureau said on its website
March 21. Economic growth is expected to accelerate to 4 percent this year,
according to Standard Chartered Plc in December.

Dubai’s debt isn’t graded by credit
rating companies. Neighboring Abu Dhabi is rated Aa2 at Moody’s Investors
Service, the third-highest investment-grade ranking. Dubai received a $20
billion bailout from the Abu Dhabi government and the UAE’s central bank in

The sheikhdom has spent billions of
dollars since 2002 to develop its property sector and to transform into a
tourism, trade and financial-services hub. In the process, Dubai and its
state-owned companies ran up debt of at least $129.3 billion, according to
estimates by Credit Suisse Group AG.

“Dubai represents a good recovery
story, albeit with increasing refinancing risks,” said Mashreq’s Hussain.

The difference in yield between Dubai’s
6.396 percent dollar sukuk and Malaysia’s narrowed 24 basis points to 284 on
Wednesday, according to data compiled by Bloomberg. The Bloomberg- AIBIM-Bursa
Malaysia Sovereign Shariah Index, which tracks nine of the most-traded
ringgit-denominated government securities, was at 101.766 on Tuesday, compared
with 101.695 a week earlier. The gauge has gained 0.2 percent this month.

Sales of sukuk from the six-nation
GCC rose this year. Offerings increased to $697m from $450m in the same period
last year, according to data compiled by Bloomberg. Global issuance of the
debt, which pays asset returns to comply with Islam’s ban on interest, reached
$3.9bn compared with $1.1bn a year ago.

Sukuk, or bonds that use asset
returns to comply with Islam’s ban on interest, from the region returned 1
percent so far this month, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index
shows. Debt in developing markets gained 0.9 percent, JPMorgan Chase &
Co.’s EMBI Global Diversified Index shows.

Dubai World signed the deal with
about 80 creditors, the Dubai government’s media office said in an e-mailed
statement on Wednesday. More than 99 percent of the company’s creditors agreed
to the new debt terms in September and all of the about 80 lenders consented
the following month. The formal signing of the restructuring agreement awaited
documentation by lawyers.

The company’s credit crisis roiled
international markets in November 2009, pushing the yield on Dubai’s government
sukuk up more than 3 percentage points to 9.32 percent that month.

Nakheel PJSC, Dubai World’s property
subsidiary that is building palm-tree shaped islands off the emirate’s coast,
is in separate discussions with banks to restructure about $10.5 billion of
bank and trade-creditors’ debt.

“Ironically, 12 months on, Dubai is
becoming the flight to stability, and who would have said that 12 months ago
when everybody was looking outside Dubai to other emirates, to Qatar and
Bahrain,” Simon Penney, chief executive officer for the Middle East and Africa
at Royal Bank of Scotland Group told reporters on Tuesday. “The fundamentals of
Dubai which everyone talks about have actually been demonstrated.”

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