Islamic bond sales in Gulf countries could double to $50 billion in 2008 despite a global credit crunch as investors become more accustomed to wider spreads, a Morgan Stanley executive said on Sunday.
The US investment bank, which has bond mandates in the Gulf in excess of $1 billion, expects the correction in the credit markets to stabilise in the first quarter of next year, Yavar Moini, an executive director at Morgan Stanley, told Reuters in an interview in Dubai.
“The global market inclusive of the GCC is about $80 billion…issuance in GCC will be at least $50 billion in 2008,” “We’ve already done about $20 billion to $25 billion this year and had market conditions been better it would have been closer closer to $40 billion.”
Islamic bonds, or sukuk, comply with the religion’s ban on the receipt of interest, and returns derived from underlying physical assets, such as rent from real estate, are paid to bondholders.
Seven of 11 Islamic bankers and analysts polled by Reuters last month said they expected Gulf Arab sukuk sales to pick up again to pre-credit crunch levels by the end of March next year.
Moini said issuers would need to get accustomed to new pricing conditions where spreads have almost doubled since a flood of sukuk sales in June.
“There is a fundemental correction of how credit is viewed, but there is no immediate prospect of getting to the levels prevalent in June,” he said.
Some government entities, including Dubai Electricity and Water Authority (Dewa), have gone to the markets as the urgency to fund expansion can no longer wait. The state-owned utility is undertaking a $19 billion expansion programme to meet growing demand in the emirate.
“Some have been held back, but other government entities like Dewa must become frequent issuers. They will need to issue six months down the road as well and then on a weighted average,” Moini said.
Moini said he expected sukuk issuances to be few in the first quarter, although several “significantly-sized” bonds would have to “come to the market.”
Morgan Stanley has a pipeline of about $1 billion worth of sukuk and bonds, which it expects to market early next year.
“We have been affected by capital markets and some of our issuers didn’t think it was prudent to come to the market at the moment…some are straight sukuk and others convertible,” he said, adding that one would be of becnhmark size.
Benchmark is considered above $500 million.
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