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Mon 22 Nov 2010 09:23 AM

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Ireland banking crisis sparks sukuk slump

Islamic bonds decline by the most since May as Ireland seeks aid to shore up its banking system

Ireland banking crisis sparks sukuk slump
DEEP DROP: Islamic bonds slumped last week by the most since May
Ireland banking crisis sparks sukuk slump
(Getty Images)
Ireland banking crisis sparks sukuk slump
(Getty Images)

Islamic bonds slumped last week by the most since May as Ireland sought aid to shore up its banking system, reducing demand for the yield premium available on sukuk and damping the outlook for new sales.

Average yields climbed 22 basis points to 4.88 percent, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Trading volumes declined because of the holiday in the Persian Gulf from Nov. 15 to Nov. 18 to celebrate the Muslim festival of Eid-al-Adha, according to Kuala Lumpur-based CIMB-Principal Islamic Asset Management Bhd.

Sales of Islamic bonds, which pay asset returns to comply with the religion’s ban on interest, slumped this year due to debt restructurings and falling property prices in the Middle East. The sell-off may persist through to the year-end as investors seek safer securities on concern European governments will struggle to finance budget deficits, said Zeid Ayer, a portfolio manager at CIMB-Principal.

“There have been concerns on Europe’s debt and emerging markets have generally been affected by that,” Zeid, who helps oversee $1.6bn of Shariah-compliant assets, said in an interview on Nov. 19. “I haven’t been active in the past couple of weeks, partly because of the holidays.”

The difference between the average yield for sukuk and the London interbank offered rate widened 8 basis points last week to 341 basis points, the most since the week ended Oct. 22, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

The yield premium investors demand to hold Ireland’s 10- year government bonds over German bunds widened to a record 646 points on Nov. 11, according to data compiled by Bloomberg. Ireland applied for a bailout from the European Union and International Monetary Fund. Finance Minister Brian Lenihan said the loan will be less than 100bn euros ($137bn).

The euro advanced to a one-week high of $1.3745 today on optimism the agreement to rescue Ireland’s banks will prevent contagion across the region’s debt markets. The common currency rose for a fourth day after European Union finance ministers said the deal will create a capital fund for Ireland’s banks and may end up “restructuring” the financial industry.

“Appetite for risk has turned 180 degrees as we approach the end of the year,” Gerald Ambrose, head of Aberdeen Asset Management Plc’s Malaysian unit, said in an interview from Kuala Lumpur on Nov. 19. “Definitely, there are more sellers than buyers.” Aberdeen’s global units oversee more than $243bn including Shariah-compliant funds, he said.

Total sales of Islamic bonds dropped 29 percent to $13.7bn this year, according to data compiled by Bloomberg. Sales of ringgit-denominated sukuk in Malaysia, the world’s biggest market for sukuk, fell 31 percent to 21.4bn ringgit ($6.9bn). Offerings from the six-nation Gulf Cooperation Council declined 36 percent to $3.97bn.

Average yields on sukuk from the GCC, which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, increased last week. The rate rose 25 basis points to 5.74 percent and has climbed 43 basis points in two weeks, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index.

A 50 percent slump in real-estate prices in Dubai, the Persian Gulf’s financial hub, since 2008 hurt sukuk issuance from the region. Dubai World said in September it reached an accord with most of its creditors to restructure $24.9bn of debt. Nakheel, a unit of Dubai World, said on July 14 that a group of its creditors unanimously supported a plan to alter the terms on $10.5bn of debt.

The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 rose two basis points today to 2.76 percent, extending last week’s 12-point climb, according to prices provided by Royal Bank of Scotland Group. It has advanced 43 basis points from a record low 2.33 percent on Nov. 4. Yields on the Dubai government sukuk rose 33 basis points in the week to 6.61 percent. The difference in yield between Dubai’s notes and Malaysia’s widened 11 basis points to 386.

Shariah-compliant bonds returned 11.65 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in emerging markets gained 14.5 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

“If news out of Europe continues to be bad, there will be a natural flight to quality because people want safer assets,” said Zeid at CIMB-Principal, a joint venture between U.S.-based Principal Global Investors and Malaysia’s CIMB Group Holdings Bhd.


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OSAMO 9 years ago

The era of global isolation is over so is the need for us to understand that sometimes countries in thousands of miles away may be materially affected by development in another continent.

Whilst the bail-out might have affected the slump, the impact may not be materially fatal. It is obvious that the bail-out will probably come out from development funds from EU and other regional blocs rather that privately owned funds.

In the interim, the slump may just be a reflection of the season end,general economic outlook and the speculative nature of investment vis-a-vis the year end effect.

This is November and ( most economic) year ends in December!