Sukuk Backed by Airport, Utility Revenue Favored by Funds: Islamic Finance

Islamic bonds that pay returns based on cash flows from airports and utilities rather than income from property may stay in favor in the coming year after a drop in Persian Gulf real-estate prices shook investor confidence.

Saudi Electricity Co.’s 7 billion-riyal ($1.9 billion) sukuk sold in May was underwritten by income from fees such as connection charges, according to its prospectus. Nomura Holdings Inc., Japan’s largest brokerage, sold Islamic debt in Malaysia in July using aircraft as the underlying asset. Pakistan raised 51.8 billion rupees ($605 million) in a Nov. 8 Islamic bond sale linked to the Jinnah Terminal at Karachi’s Quaid-e-Azam International Airport.

The 50 percent decline in real-estate prices in Dubai from their peak in mid-2008 contributed to a 31 percent retreat this year in global sales of Islamic debt that pay asset returns to comply with the religion’s ban on interest. Offerings are picking up following an agreement by Dubai World, one of the emirate’s three main state-owned holding companies, in September to reschedule debt payments.

“With new bonds coming after debt restructuring in the Gulf, investors will be keen to know the quality of businesses and what kind of cash flows they generate,” Esther Teo, who helps manage the equivalent of $2.9 billion of Islamic and non- Islamic funds at Kuala Lumpur-based HwangDBS Investment Management Bhd., said in an interview yesterday. “The asset linked to a sukuk is important given the way it is structured and after the default concerns in the Middle East.”

Upcoming Issues

Saudi Arabian Oil Co. and Total SA, Europe’s third-biggest oil company, plan to sell $1 billion of sukuk this year in a joint issue, Simon Eedle, global head of Islamic banking at Credit Agricole SA, the lead arranger, said in Abu Dhabi in October. Nakheel PJSC, the developer of palm-shaped islands off Dubai’s coast, may issue sukuk to its trade creditors in the first quarter, Faisal Mikou, executive vice president at the Investment Corp. of Dubai, said in the emirate on Nov. 28.

The Palestine Monetary Authority will offer Islamic debt for the first time in 2011. The central bank may sell as much as $50 million of notes to jump-start the territory’s Shariah- compliant finance industry and raise funds to construct its headquarters, Governor Jihad al-Wazir said in an interview in Ramallah on Nov. 25.

Sukuk sales dropped to $13.7 billion this year, according to data compiled by Bloomberg. Offerings from the Gulf Cooperation Council, which comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, declined 40 percent to $4 billion in 2010 from the same period last year.

‘Out of Favor’

“Real estate continues to be out of favor, particularly in the Gulf Cooperation Council countries,” Rafael Martinez Dalmau, the Singapore-based head of Shariah-compliant portfolio management at BNP Paribas SA, said in an interview in Kuala Lumpur yesterday.

KPJ Healthcare Bhd., a Malaysian healthcare provider, plans to sell as much as 500 million ringgit ($159 million) of sukuk to refinance debt and fund its capital spending needs, according to a company statement on Nov. 12. The debt is linked to funds from its Real Estate Industrial Trust, Alvin Lee Swee Hee, the chief financial officer, wrote in an e-mail today.

Malaysia Airports Capital Bhd. plans to sell as much as 1 billion ringgit of 12-year Islamic notes to yield around 4.6 percent to 4.8 percent as soon as tomorrow, according to a person familiar with the matter. The offering may grow in size to be more than 1 billion ringgit, another person requesting not to be identified said Nov. 23.

“We want issuers to meet their liabilities from cash flows they generate from their businesses rather than by selling that asset,” Sajjad Anwar, who helps manage the equivalent of $160 million of Islamic and non-Islamic funds at NBP Fullerton Asset Management Ltd., said in a Nov. 30 phone interview from Karachi. “Collateral based on real estate or a piece of land was popular, but it was not likely to be a long-term solution.”

Valuation Concerns

Shariah-compliant bonds returned 11.1 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in emerging markets gained 13.1 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate narrowed 11 basis points yesterday to 350 points, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

The yield on Malaysia’s 3.928 percent Islamic note due June 2015 was little changed today after rising 11 basis points yesterday, according to prices from Royal Bank of Scotland Group. It has climbed from a record low of 2.33 percent on Nov. 4. The yield on Dubai’s 6.396 percent sukuk due November 2014 rose four basis points this week to 6.78 percent, data compiled by Bloomberg show.

‘Adversely Affected’

The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s was little changed today at 384, according to data compiled by Bloomberg.

“In asset-backed sukuk, or sukuk that is secured with assets either through a true sale or as collateral, if that asset has reduced in value by so much percent, irrespective of what nature of instrument you have, that instrument will be adversely affected,” Yavar Moini, senior adviser for global capital markets at Morgan Stanley in Dubai, said in an interview in Kuala Lumpur yesterday.

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

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.

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