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Sukuk's Best Month in Four Signals More Gains on Inflows: Islamic Finance

Islamic bonds gained at half the pace of emerging-market debt in July. Fund managers say they may make up the lost ground as funds flow into developing nations and Dubai World restructures debt.

“As sentiment toward emerging markets improves globally and default risks wane, Islamic debt will stand to benefit,” said Usman Ahmed, a senior fund manager in Dubai at Emirates NBD Asset Management, which manages $300 million of bonds at the unit of the United Arab Emirates’ biggest lender. “The sukuk market is benefitting from the increased demand, and improved earnings at some of the biggest issuers.”

Global bonds that comply with Shariah law gained 2.1 percent, double the return in June and the most since a 4.1 percent advance in March, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. JPMorgan Chase & Co.’s EMBI Global Diversified Index, which tracks debt from 46 emerging-market countries, climbed 3.9 percent.

Global emerging-market bonds received more than $1 billion in the week ended July 28, Cambridge, Massachusetts-based EPFR Global said in a statement. Developing-nation economies will expand 6.8 percent as a group this year, more than double the 2.6 percent pace for advanced countries, according to estimates from the Washington based International Monetary Fund.

Yields Drop

Sukuk sold by Dubai-based DP World Ltd., the fourth-largest port operator, surged 5.7 percent, according to Royal Bank of Scotland Group Plc prices. The debt usually pays a share of profits to avoid payment of interest that is banned in Islamic law. Debt from Malaysia’s government gained 2.4 percent, while and Kuala Lumpur-based Petroliam Nasional Bhd., the nation’s state oil company, bonds advanced 2.5 percent in July.

The yield on DP World’s 6.25 percent bond due 2017 dropped 90 basis points, or 0.90 percentage point, this month to 7.72 percent, the lowest level since March. The company said on July 27 it handled 16 percent more containers at its 50 terminals worldwide in the first six months of this year.

The yield on Malaysia’s 3.928 percent Islamic note due June 2015 fell to 2.995 percent and is down 52 basis points this month, according to prices from the Royal Bank of Scotland Group Plc. Prime Minister Najib Razak unveiled a plan last month to trim the budget deficit to 2.8 percent of gross domestic product by 2015 from an estimated 5.3 percent this year.

The yield on Petronas’s 4.25 percent notes due in 2014 slid to a record low of 2.92 percent yesterday. Crude oil prices have been 10 percent stronger in the fiscal year started April 1 than the average for the preceding 12 months.

Spread Narrows

The spread between the average yield for emerging market sukuk and the London interbank offered rate narrowed 35 basis points, or 0.35 percentage points, to 408 this month, according to HSBC/NASDAQ index. The spread rose four basis points yesterday.

“The sukuk industry, in general, has done very well,” Zeid Ayer, who helps oversee $1.6 billion as chief investment officer at Kuala Lumpur-based CIMB-Principal Islamic Asset Management Sdn., said in an interview yesterday. “Emerging markets are more attractive to invest in than developed markets, as you have economic crisis in Europe with Greece and Spain in the spotlight. So you see the inflows” into regular debt and sukuk.

Sukuk issuance declined this year as investors spurned debt of developers after real-estate prices slumped in the Middle East. Global sales fell 29 percent to $6.7 billion so far this year, according to data compiled by Bloomberg. Islamic bonds are typically backed by assets and pay a share of profits instead of interest.

Sukuk Sales

Dubai World, a state-owned investment company, on said on July 22 it’s seeking to close negotiations “in the coming months” to restructure $23.5 billion of liabilities. Its property unit Nakheel PJSC, which held a separate meeting with lenders July 14, said a group of creditors “unanimously supported” altering the terms on $10.5 billion of loans and unpaid bills.

Sukuk sales will increase in the second half, led by first- time issuers, because of improved international market conditions, Standard & Poor’s said in a statement on July 28.

The Kazakh government will sell securities in the second half of the year, Aibek Bekzhanov, head of Islamic instruments at the Regional Financial Center of Almaty, said in an interview July 27. The Philippines’ state-owned Al-Amanah Islamic Bank is exploring a sale, the lender’s President Armando Samia said in a July 26 interview. State-run Islamic Bank of Thailand plans to raise $155 million, President Dheerasak Suwannayos said in a July 14 interview.

“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,” said Mohamed Damak, a credit analyst at Standard & Poor’s in a July 28 statement.

To contact the reporter on this story: Khalid Qayum in Singapore kqayum@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net

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