Sukuk Trails Emerging Debt for Fourth Month as Trade Ebbs: Islamic Finance

Islamic bonds lost to emerging- market debt for the fourth month in August and fund managers say returns won’t catch up until trading increases and Persian Gulf companies restructure their debt.

Shariah-compliant notes rose 1.4 percent last month, down from 2.6 percent in July, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. They have underperformed emerging-market bonds for the longest stretch since July 2009. Debt in developing nations climbed 2.4 percent, adding to the 4.1 percent return in the prior month, JPMorgan Chase & Co.’s EMBI Global Diversified Index showed.

Sukuk won’t close the gap until investors gain confidence in the global economy and creditworthiness in the Gulf improves, according to Nomura Islamic Asset Management and Aberdeen Asset Management Plc. New sales after the Muslim fasting month of Ramadan ends in mid-September will help boost trading, said CIMB-Principal Islamic Asset Management Bhd. and Exotix Ltd.

“The most immediate catalyst to a recovery would come in November when Dubai World’s restructuring should be concluded,” Ahmad Alanani, an associate director for the Middle East and North Africa at Exotix, an investment bank specializing in illiquid assets, said in an interview in Dubai on Sept. 1. “The sukuk market still lacks depth and you have all these problems and defaults.”

Dubai World, the state-owned company renegotiating terms on $23.5 billion of debt, reached an agreement with its main creditor group in May and said in July it expected to complete the talks in the “coming months.”

‘Post Ramadan’

Global sukuk sales fell 12 percent to $10.3 billion so far this year from a year earlier, according to data compiled by Bloomberg. Gulf issuance dropped 24 percent to $2.47 billion. Plans for almost $16 billion of Islamic bonds have been announced by governments and companies for the next couple of years.

“We’re hearing some new sukuk issues coming to market post Ramadan that should help bring some liquidity,” Alanani said.

Investors can’t always trade sukuk on a daily basis because there aren’t enough buyers or sellers in the market, according to Zeid Ayer, who helps manage $1.6 billion of Shariah-compliant assets at Kuala Lumpur-based CIMB-Principal. During Ramadan, Muslims tend to work fewer hours, especially in the Middle East, he said in an interview yesterday.

“The spread between the bid and ask price could be as wide as two points for some of the less liquid debt in the Gulf and that’s what discourages frequent trading,” said Zeid, whose firm is a joint venture between U.S.-based Principal Global Investors and Malaysia’s CIMB Group Holdings Bhd. Bondholders may have to wait “quite a bit” before they can realize gains, he said.

Yield Spreads

The spread between the average yield for sukuk and the London interbank offered rate narrowed 16 basis points to 385 in August. The gap reached 560 at the end of November, after Dubai World announced plans to reorganize its debt.

The extra yield investors demand to hold the Dubai Department of Finance’s dollar sukuk rather than Malaysia’s 3.928 percent Islamic note due June 2015 widened four basis points to 412.5 basis points in August, according to Royal Bank of Scotland Group Plc data. The gap has narrowed to 390 since.

Sukuk returned 10.2 percent in 2010, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing nations gained 12.8 percent, EMBI Global Diversified Index showed.

Emerging Markets

Emerging-market bond funds attracted $1.18 billion of net investment in the seven days to Aug. 25, a 13th straight week of inflows, according to Cambridge, Massachusetts-based research firm EPFR Global.

“The outperformance is driven to a larger extent by flow of funds” into emerging markets, “which has been a lot stronger than the same flows into sukuk,” Gerald Ambrose, the head of Aberdeen Asset’s Malaysian unit, said in an interview in Kuala Lumpur on Sept. 1. Aberdeen Asset Management oversees more than $243.1 billion globally.

Returns on Islamic notes from Gulf issuers slowed in August on conflicting signals over progress in repaying debt.

Dubai World-controlled property company Nakheel PJSC said earlier this year it plans to offer tradable sukuk to repay part of its debt. Nakheel aims to settle 1.5 billion dirhams ($408 million) of bills it owes to trade creditors in September, Chairman Ali Lootah was cited as saying by the Al Bayan newspaper.

Moody’s Investors Service on Aug. 11 placed the Ba2 credit rating of Dar Al Arkan Real Estate Development Co., Saudi Arabia’s biggest property company by market value, on review for a possible downgrade.

‘Risk Profile’

The yield on Dar Al Arkan’s 10.75 percent sukuk maturing in 2015 rose to 10.37 percent in August from 10.12 percent at the end of July, according to prices compiled by Bloomberg. It yielded 10.25 percent today. The yield on Nakheel’s 2.75 percent notes due January 2011 added five basis points to 15.77 percent last month and climbed to 16.18 percent on Sept. 1.

Islamic notes sold by the six-member Gulf Cooperation Council returned 0.9 percent in August, slowing from 2.6 percent a month earlier, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The GCC includes the United Arab Emirates, Saudi Arabia, Kuwait, Oman, Qatar and Bahrain.

“As investors shy away from risky assets, sukuk would be affected, given that sukuk issuer credit risk is mostly in the GCC, which has a riskier risk profile compared with Asian emerging markets,” Takamitsu Oi, a Kuala Lumpur-based fund manager at Nomura Islamic, said in an interview yesterday. “A recovery in issuance and an increase in demand from various investors, including non-Muslims, will support the market.”

To contact the reporter on this story: Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net; Khalid Qayum in Singapore kqayum@bloomberg.net.

• Tweet
• More
  • Business Exchange
  • Buzz up!
  • Digg
• Print
• Email