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Mon 8 Nov 2010 04:24 PM

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Gulf issuers skip sukuk in rush to borrow

Issuance of Islamic bonds, or sukuk from GCC region dropped 28 percent in 2010 to $4.5bn

Gulf issuers skip sukuk in rush to borrow
The $1bn Sharia-compliant bond sale by Saudi Aramco and Total is the only announced sukuk sale for the rest of 2010. (Getty Images)

Non-Islamic bond sales from the region may almost double to $15bn this quarter as companies from Qatar National Bank, the country’s largest bank, to Oman-based MB Petroleum Services tap the market, investment bank Exotix in Dubai estimates. The $1bn Sharia-compliant bond sale by Saudi Aramco and Total is the only announced sukuk sale for the rest of 2010.

The abundance of liquidity in the non-Islamic debt market, the enforceability of investors’ rights in defaults and the extra cost associated with Islamic bond documentation are steering issuers away from sukuk, Unicorn Investment Bank BSC’s senior vice president of capital markets, Nida Raza, said November 2.

“People are just taking a quicker, faster execution route,” said Alex von Sponeck, London-based managing director at Goldman Sachs International’s investment banking division. “Who knows when liquidity dries up again or economic instability can cause markets to shut down again.”

Issuance of Islamic bonds from the six-nation Gulf Cooperation Council dropped 28 percent in 2010 to $4.5bn after debt restructuring, defaults and tumbling property prices hurt investor confidence, data compiled by Bloomberg showed. That contrasts with a drop of less than 1 percent to $26.8bn in non-Islamic bond issues this year, with fourth- quarter sales of $8bn, the data show.

Global sukuk sales declined 29 percent to $13.7bn this year, according to data compiled by Bloomberg, as four defaults in the past 18 months prompted investors to demand higher returns from property-related issuers. Issuance reached a record $31bn in 2007.

Improving risk appetite in the Gulf after Dubai World’s agreement with creditors this year to restructure $24.9bn in debt bodes well for sukuk sales in 2011, according to HSBC Holdings Plc and Moody’s Investors Service.

“We continue to expect more issues to come to the market, with the likes of Saudi Arabia leading the way,” Shehzad Janab, head of asset management at Dubai-based Daman Investments PSC, which has more than AED5bn ($1.4bn) under management, said in an interview on November 2. “Traditionally, the issue with pricing was due to a thin secondary market with sukuk priced higher due to the illiquidity; that doesn’t hold as true anymore.”

The difference between the average yield for emerging- market sukuk and the London interbank offered rate narrowed 106 basis points, or 1.06 percentage points, in the second half to 3.38 percent on Nov 5, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

Non-sharia-compliant issues are still outperforming Islamic debt. Bonds in developing markets returned 18 percent this year, JPMorgan Chase & Co's EMBI Global Diversified Index, while global sukuk gained 13 percent, according to the HSBC/NASDAQ Dubai US Dollar Index. Islamic bonds in the GCC also returned 13 percent, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows.

The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 fell one basis point to 2.33 percent today, according to prices provided by Royal Bank of Scotland. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s narrowed seven basis points to 387 last week, according to data compiled by Bloomberg.

Qatar National Bank confirmed hiring banks to manage the sale of a dollar-denominated bond on Oct. 28. It did not disclose the amount it aims to raise through the issue. MB Petroleum’s $350m notes, the first high-yielding debt from the region this quarter, may be priced to yield about 11.25 percent, two people familiar with the sale said Nov 4. Abu Dhabi-based International Petroleum Investment Co. and First Gulf Bank PJSC are also planning sales.

Dubai Electricity & Water Authority received orders worth $13bn for $2bn of debt last month in its largest dollar-denominated bond sale. Thirty-eight percent of the offering went to European investors, 30 percent to US investors, and 16 percent each to Asian and Middle Eastern investors, the company said.

“The demand is coming from out of the region, so it’s not primarily Islamic in nature, people are looking for yield,” Douglas Hansen-Luke, chief executive at Robeco Middle East, which manages $200bn globally, said in a Nov 3 interview. “Conventional has rebounded so quickly and companies are taking advantage of that.”

The Jeddah-based Islamic Development Bank and Abu Dhabi Islamic Bank, the United Arab Emirates’ second-biggest sharia-compliant bank, are the only GCC issuers to have raised Islamic debt this quarter.

“The markets are being heavily driven by opportunistic borrowing, rather than credit fundamentals,” said John Bates head of fixed income at Silk Invest Ltd., a London-based fund that specialises in frontier markets in a phone interview on Nov 4. “You’ve got a U.S. dollar investor-base chasing yield around the planet and they’re always going to go for the easiest, most- liquid assets. Sukuk issues are not as well known.”