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Gulf sukuk see best quarter in nine months

Dana El Baltaji and Arif Sharif (Bloomberg) / 5 July 2011

DUBAI - Islamic bonds from the Arabian 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 six-nation Gulf Cooperation Council returned 3.6 per cent 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 per cent Islamic notes due July 2017 from government-controlled ports operator DP World Ltd led the gains, advancing 5.9 per cent in the period, according to data compiled by Bloomberg. Dubai’s sukuk rallied 3.3 per cent.

Debt agreements in the UAE by state-owned holding company Dubai World and property developer Nakheel PJSC have improved sentiment towards the emirate. A shortage of offerings from the GCC, where sales dropped 25 per cent to $1.86 billion so far in 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 yesterday. “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 on 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 US Dollar Sukuk Index. The rate dropped eight basis points to 4.16 per cent 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 per cent in the second quarter, according to the HSBC/NASDAQ Dubai US 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 per cent. Bonds in developing markets rose four per cent, JPMorgan Chase & Co.’s EMBI Global index shows. 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 per cent on February 28.

While the rate has since dropped, only five issuers from the GCC sold Shariah-compliant securities this year, 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, according to Ahmed Talhaoui, head of asset management at Abu Dhabi-based Royal Capital PJSC, said in an e-mailed response to questions on Sunday.

The rate on DP World’s sukuk dropped 85 basis points since the end of March to 5.64 per cent on June 30, Bloomberg prices show. It last traded at 5.58 per cent on July 1. The yield on Dubai’s 6.396 per cent Islamic bonds due November 2014 dropped 66 basis points in the period to 4.87 per cent on June 30.

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