Islamic Bond Sales may Reach Record on Gulf Demand

Filed on April 1, 2009

DUBAI - Islamic bond sales may rebound and reach a record this year, with the Gulf accounting for about two-thirds of the debt issued as higher yields attract investors, NCB Capital said.

There is an estimated ‘pipeline’ of about $39.3 billion of so-called sukuk, Jarmo Kotilaine, chief economist at Saudi Arabia’s NCB Capital, said in a report received on Monday. He estimates the pipeline from the Gulf Cooperation Council to be $24.6 billion.

“GCC sukuks, which have also faced a sell-off in recent months, are currently trading at attractive yields,” Kotilaine wrote in the GCC Debt Capital Markets report. “Sukuks have the potential to capitalise on the growing appeal of Shariah-compliant finance in today’s significantly more risk-averse market environment.”

The credit crunch hit Islamic bonds last year as tumbling oil prices sapped demand from their target market — the oil-rich Middle East. Corporate and government sales of sukuk, which comply with Shariah law by using asset returns to pay investors instead of interest, slumped to $13.9 billion in 2008 from a record $31 billion in 2007, Bloomberg data show.

The GCC, including the United Arab Emirates, Saudi Arabia, Kuwait, Bahrain, Qatar and Oman, had debt sales of $6.2 billion last year, Bloomberg data show.

The average extra yield on corporate and government sukuk above the London interbank offered rate is 12.26 percentage points, up from 5.76 percentage points a year ago, according to HSBC-Nasdaq Dubai indexes.

Islamic bond sales from the UAE will account for about $12.6 billion of total issuance this year, according to NCB. First Gulf Bank PJSC, which is owned by Abu Dhabi’s ruling family, may sell more than $2.5 billion of sukuk this year, the Riyadh-based bank said, citing data compiled by Dubai-based Zawya newswire.

“The dominance of corporate issuers points to the growing popularity of debt securities as an alternative to bank borrowing and equity issuance,” Kotilaine wrote in the report.

Sales of Islamic debt this year include $2 billion by Emaar Properties PJSC’s and $1 billion from Doha Bank QSC., Qatar’s third biggest lender, according to the report. Saudi Arabia’s Islamic Development Bank will sell $1 billion of the debt this year, it said.

“Investors may increasingly turn to sukuks issued by government-backed firms with good track records and fundamentally strong assets,” according to the NCB report.

Islamic bonds typically are secured by real estate and assets that produce income or profits to pay investors. Sukuk took off after Malaysia raised $600 million in the first overseas sale of the bonds in 2002.

By 2008, oil wealth and government initiatives helped turn Islamic banking and insurance into a $1 trillion industry.

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