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Mon 30 May 2011 12:41 PM

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Dubai sukuk most susceptible to Europe woes

Dubai's Islamic bonds tumbled the most in 6 months last week, yield plunges 1.65% this year

Dubai sukuk most susceptible to Europe woes
ISLAMIC BONDS: The cost of insuring Dubai’s debt against default rose six basis points last week to 340

Dubai’s Islamic bonds tumbled the most in six months last week as investor concern over Europe’s growing debt crisis prompted a sell-off of the region’s riskier assets.

The yield on the 6.396 percent dollar sukuk maturing in November 2014 climbed 22 basis points, or 0.22 percentage point, the biggest weekly gain since November and the steepest among Arabian Gulf issuers, to 4.83 percent on May 27, Bloomberg prices show. The rate fell to a record low of 4.6 percent on May 19. The average yield of Gulf sukuk was unchanged last week at 4.55 percent as yields on Bahrain’s government bond dropped, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index.

“Dubai’s sukuk rallied during the Mideast crisis when investors identified the emirate as a safe haven in the region,” Mark Watts, head of fixed-income at National Bank of Abu Dhabi’s asset management group, which manages AED4.1bn ($1.1bn). However, “Dubai remains in the eyes of the market a weaker credit and as such its securities remain vulnerable to sell-offs when market sentiment turns,” he said.

The emirate, which doesn’t have a rating, and its companies ran up debt of at least $129.3bn, according to estimates by Credit Suisse Group, as Dubai developed its property, tourism, trade and financial-services industries. The sheikhdom rattled global markets in November 2009 after state-owned Dubai World said it will renegotiate about $25bn in debt.

The cost of insuring Dubai’s debt against default rose six basis points last week to 340, according to data provider CMA, which is owned by CME Group and compiles prices quoted by dealers in the privately negotiated market. The rate is the third highest in the Middle East after Lebanon and Egypt, according to CMA data on Bloomberg.

Greece’s prime minister last week failed to secure support from the country’s main opposition parties for new austerity measures, threatening his efforts to keep bailout funds flowing and avoid default. European Union leaders are considering new loans and a voluntary extension of bond repayments for Greece to close a funding gap in 2012 of about €30bn ($43bn).

Bondholders of Greek, Irish and Portuguese debt may have “significant losses” because of Europe’s economic crisis, Nobel laureate Paul Krugman said May 26.

 “Over the previous couple of months, we’ve had a straight line rally in regional fixed income, so last week saw some probably overdue profit taking,” Akber Khan, a director at Al Rayan Investment in the Qatari capital Doha, said in a telephone interview May 29.

The yield on Dubai’s sukuk has plunged 165 basis points this year after the UAE and Qatar were spared the violent protests that spread across the Middle East, and Dubai World reached an accord with creditors in March.

“I view these sell-offs as buying opportunities,” Watts said.

Dubai’s bond returned 3 percent this quarter, while Arabian Gulf debt gained 3.1 percent, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. Fixed-income securities in developing nations rose 2.7 percent since the end of March, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.

Sukuk sales in the Gulf declined 20 percent to $1.86bn so far this year boosting investor demand for the debt and driving borrowing costs in the region to the lowest in almost six years, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The extra yield investors demand to hold Gulf debt over the London interbank offered rate dropped 28 basis points this quarter to 292 on May 27, the data show.

The yield on Bahrain’s 6.247 percent Islamic bonds maturing June 2014 fell 11 basis points last week to 3.11 percent, extending its decline for a sixth week. The rate soared to 4.45 percent on March 15, after protests spread to the island nation.

“If the situation in Europe worsens and we see more risk aversion, Dubai’s spread will widen,” Ahmed Talhaoui, the Abu Dhabi-based head of investment at Royal Capital PJSC, said in a telephone interview May 29. “Dubai is perceived as a higher risk asset name, so it’s easily affected by negative sentiment.”

The difference in yield between Dubai’s debt and Malaysia’s 3.928 Islamic bond maturing June 2015 widened 28 basis points last week to 244 on May 27, the data show.

The Bloomberg-AIBIM-Bursa Malaysia Sovereign Shariah Index, which tracks the most traded ringgit-denominated bonds, was little changed on May 27. It has gained 0.7 percent this quarter.