Slump in sukuk worsens as pricing deters issuers

Islamic bond sales in the Arabian Gulf are on course for the slowest third quarter since 2010 as borrowers delay issuing sukuk after costs rose.

By Samuel Potter And Arif Sharif (Bloomberg)

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Published: Tue 20 Aug 2013, 10:29 PM

Last updated: Tue 7 Apr 2015, 7:49 PM

The SR1 billion ($267 million) sale of Jeddah-based construction company Saudi Binladin Group is the only issue in the GCC this quarter, compared with five sales totalling $5.27 billion in the same period last year, according to data compiled by Bloomberg. The average yield on Shariah-compliant debt from the GCC has risen 95 basis points in 2013 to 3.87 per cent on August 16.

Sales in the region reached a record $8.5 billion in the first quarter as the government of Saudi Arabia and the Dubai Electricity and Water Authority led issuers seeking to benefit from near record low yields.

Since the US Federal Reserve said in June it could start reducing its asset-purchase programme as early as this year, borrowing costs have risen globally and debt issuance slowed.

“Most regional sukuk issuers are not driven by necessity at the moment,” Rizwan Kanji, a Dubai-based partner at King & Spalding, said by phone. “They don’t need the funds here and now, so they are able to be choosy and they want better pricing.”

Borrowers from the region have sold $10.8 billion of sukuk this year compared with $17.7 billion in the year-ago period, according to data compiled by Bloomberg. Issuance so far in the third quarter is the least in July and August since 2010, when no sales had taken place at this point.

The yield on 10-year US Treasuries reached 2.83 per cent on August 16, the highest since July 2011, on heightened speculation a strengthening US economy will prompt the Fed to reduce its bond-buying programme as soon as next month.

The average yield for Shariah-compliant debt in the GCC rose 11 basis points last week, or 0.11 of a percentage point, according to the HSBC/Nasdaq Dubai GCC US Dollar Sukuk Index.

“Until there is increased clarity on the US central bank’s next move and its impact on interest rates, we shouldn’t expect issuance to meaningfully increase,” Gus Chehayeb, Dubai-based research director for the Middle East at Exotix, said by e-mail on Sunday.

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