Arab Gulf sukuk see best quarter in 9 months

Published July 5th, 2011 - 12:25 GMT

Islamic bonds from the Arab Gulf had the best quarter in nine months as debt restructurings by Dubai’s state-controlled companies and a scarcity of sukuk attracted investors.

Sukuk from the Gulf Cooperation Council returned 3.6 percent in the second quarter, the most since the three months ended September, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows. The 6.25 percent Islamic notes due July 2017 from government-controlled ports operator DP World Ltd. led the gains, advancing 5.9 percent in the period, according to data compiled by Bloomberg. Dubai’s sukuk rallied 3.3 percent.

Debt agreements in the United Arab Emirates by state-owned holding company Dubai World and property developer Nakheel PJSC have improved sentiment toward the emirate. A shortage of offerings from the GCC, where sales dropped 25 percent to $1.86 billion in the first half of 2011 from a year earlier, also helped the securities rally. The UAE, Qatar and Saudi Arabia were spared the violent protests that spread across the Middle East.

“Dubai is a tale of two cities, one before the debt deals and another after, especially concerning Nakheel,” Malek Khodr Temsah, assistant vice president of treasury and investment at Bahrain’s Albaraka Banking Group BSC, said in a telephone interview from Manama Sunday. “There was a cloud of uncertainty, which has passed.”

Appetite for sukuk from the GCC may help the securities extend their rally this year, according to Dubai-based Parth Kikani, assistant fund manager at Al Mal Capital PSC.

“You could expect another 300 to 400 basis points of total returns over the next six months from GCC sukuk,” Kikani said. The GCC includes the UAE, Bahrain, Qatar, Kuwait, Saudi Arabia and Oman.

Dubai World said it reached an accord with creditors on March 23 on about $25 billion of debt. Nakheel, the state-owned builder of palm-shaped islands off the sheikhdom’s coast, said June 29 it approved an agreement with 99 percent of bank lenders to restructure about $10.5 billion in debt. The debt deals helped bring down borrowing costs in the region.

Average yields on Islamic bonds in the GCC declined 105 basis points, or 1.05 percentage point, in the second quarter to 4.23 percent on June 30, the biggest quarterly decline since the three months ended September, according to the HSBC/NASDAQ Dubai GCC U.S. Dollar Sukuk Index. The rate dropped eight basis points to 4.16 percent on July 1.

The extra yield investors demand to hold the debt over the London interbank offered rate narrowed to a three-year low of 242 on July 1.

Global sukuk returned 3.2 percent in the second quarter, according to the HSBC/NASDAQ Dubai U.S. Dollar Sukuk Index, while the Bloomberg Malaysian Sukuk Ex-MYR Index, which measures foreign-currency Islamic debt sold by companies in Malaysia, gained 2.3 percent. Bonds in developing markets rose 4 percent, JP Morgan Chase & Co.’s EMBI Global index shows.

Still, Dubai faces a “short-term rollover risk” as $31.2 billion of debt mature by the end of 2012, the International Monetary Fund said in a report published June 16. The sheikhdom’s publicly held debt stands at $113 billion, the fund said.

On the brink of default in 2009, the emirate received a $20 billion bailout from Abu Dhabi’s government and the UAE’s central bank that year. Dubai and its state-owned companies ran up borrowings of at least $129.3 billion amid a real-estate boom, according to estimates by Credit Suisse Group AG in January.

Protests in the Middle East that toppled leaders in Tunisia and Egypt have deterred issuers from tapping the Islamic bond market and drove yields to a five-month high of 6.05 percent on Feb. 28.

While the rate has since dropped, only five issuers from the GCC sold Shariah-compliant securities in the first half of 2011, compared with 29 borrowers offering $11.4 billion globally, according to Bloomberg data.

A scarcity of sales from the GCC countries has boosted the “premium” investors are willing to pay for the debt, Ahmad Talhaoui, head of asset management at Abu Dhabi-based Royal Capital PJSC, said in an e-mailed response to questions Sunday.

The rate on DP World’s sukuk dropped 85 basis points since the end of March to 5.64 percent on June 30, Bloomberg prices show. It yielded 5.58 percent Monday. The yield on Dubai’s 6.396 percent Islamic bonds due Nov. 2014 dropped 66 basis points in the period to 4.87 percent on June 30.

The rate on the debt dropped four basis points to 4.8 percent Monday, the least in more than two weeks. The difference in yield between the emirate’s Shariah-compliant notes and Malaysia’s 3.928 Islamic bonds narrowed Monday to 208 basis points.

“You just don’t find that kind of yield in the market for government paper, especially in the GCC,” Temsah said.

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