Persian Gulf Sukuk Yield Premium Widens on Fourth Default: Islamic Finance
Cranes stand idle at The Dubai Waterfront building project by Nakheel PJSC. Photographer: Charles Crowell/Bloomberg
Yields on Islamic bonds from the Persian Gulf are climbing even as rates on conventional debt decline, after four defaults in the past 16 months prompted investors to demand higher returns.
The average yield on sukuk sold by Gulf Cooperation Council issuers rose 38 basis points to 6.99 percent yesterday from this year’s low on April 15, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The average yield on the HSBC/NASDAQ Dubai GCC Conventional US Bond Index, made up of notes that don’t comply with Muslim tenets from Qatar to Saudi Arabia, fell 24 basis points in the same period to 5.35 percent. The spread between the two has widened 62 basis points to 164.
“Investors are demanding more premiums from sukuk issuers as they see a new wave of massive refinancing or default pressure next year,” from the Gulf region, Luis Costa, a London-based emerging-markets strategist at Citigroup Inc., said yesterday. “It’s a process that’s feeding on itself.”
International Investment Group KSCC, an Islamic financial company based in Safat, Kuwait, said on July 26 it was unable to pay $152.5 million to bondholders who demanded immediate repayment after it defaulted on a $200 million Islamic bond. Persian Gulf companies have $28 billion of debt maturing in 2012, Moody’s Investors Service said in a report on June 14. Dubai-based companies have $10.4 billion of obligations maturing that same year, according to Moody’s.
Investors Nervous
Kuwait’s Investment Dar Co., owner of half of Aston Martin Lagonda Ltd. was the first company from the region to default on a $100 million sukuk in April last year, triggering concern about restructuring laws for such securities. National Central Cooling Co., a United Arab Emirates-based refrigeration company, said on May 27 it hasn’t made distribution payments on its 1.7 billion-dirham ($463 million) sukuk.
In April, Citicorp Trustee Co., trustee for a $650 million Islamic bond sold by a unit of Saudi Arabia’s Saad Trading, Contracting and Financial Services Co., said investors agreed to dissolve the trust after the unit defaulted on the debt.
“There are many companies in the Islamic arena which are still struggling and making investors nervous,” Nish Popat, a Hague-based senior investment manager at ING Investment Management Europe, said in an interview on July 26. “The increasing number of defaults and uncertainty over bondholders’ rights in the Islamic structure are making this market less attractive.”
Yields Rise
ING Investment is the asset management unit of ING Groep NV, the Netherlands biggest financial-services company.
Dubai World, the state-owned company seeking to renegotiate terms on $23.5 billion of liabilities, said on July 22 it expects to complete the restructuring process in the “coming months.” Property unit Nakheel PJSC, which held a separate meeting with its lenders July 14, said a group of its creditors negotiating on behalf of banks “unanimously supported” a proposal on altering the terms on $10.5 billion of loans and unpaid bills.
The yield on the Dubai Department of Finance’s 6.396 percent sukuk due in November 2014 fell six basis points to 7.31 percent at 1:43 p.m. in Dubai, according to data compiled by Bloomberg. The difference over similar-maturity U.S. Treasuries has widened to 581 basis points from 406 when they were sold last October.
The difference in yield between the Dubai notes and the Malaysian government’s 3.928 percent Islamic note due June 2015 has widened 42 basis points since May 31 to 424 basis points, according to data compiled by Bloomberg.
Slowing Sales
Sales of Islamic notes from companies in the Gulf have slowed to $2.5 billion so far in 2010, down 24 percent from a year earlier, and the lowest level since 2005, data compiled by Bloomberg show. Twenty-five companies from Malaysia raised 9.6 billion ringgit ($3 billion) from sukuk sales in the period, according to the data.
“We foresee sustained growth for the second-half, given issuers’ interest in tapping the market, both in historical locations like Asia, especially Malaysia, and in other regions newer to sukuk,” Standard & Poor’s Paris-based analyst Mohamed Damak wrote in a report today. “Many issuers around the world may be willing to enter the market as more favorable conditions materialize.”
Saudi Electricity Co., the state-controlled power producer, raised 7 billion riyals ($1.9 billion) issuing sukuk in May, at 95 basis points more than the three-month Saudi interbank offered rate. National Bank of Abu Dhabi PJSC, the U.A.E. lender controlled by the Abu Dhabi Investment Council, sold 500 million ringgit of Islamic bonds in Malaysia in June at a coupon rate of 4.75 percent.
‘Bad News’
International Investment became in April the second Kuwaiti company in a year to miss a sukuk payment after it failed to distribute $3.35 million due on the debt on April 12, according to a company statement. It sold the convertible notes maturing in July 2012 at 1.5 percentage points more than the U.S. dollar mid-swap rate. The five-year mid-swap rate was at 1.956 percent yesterday.
“A default in any market is enough to keep investors away,” Muhammad Asad, who manages the equivalent of $210 million as chief investment officer at Al Meezan Investment Management Ltd., said in an interview yesterday in Karachi. “It’s definitely bad news.”
To contact the reporter on this story: Haris Anwar in Dubai at hanwar2@bloomberg.net Khalid Qayum in Singapore kqayum@bloomberg.net;
Rate this Page