Yield Spreads at Two-Year Low to Spur 2011 Sales Revival: Islamic Finance
The lowest relative yields on Islamic bonds in more than two years may encourage issuers to tap the market after a 15 percent drop in new sales in 2010, helping revive interest among investors.
The difference between average yields for emerging-market sukuk and the London interbank offered rate narrowed to 282.7 basis points yesterday, the least since August 2008, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Albaraka Banking Group BSC, Bahrain’s biggest publicly traded Islamic lender, plans to sell Islamic bonds in the first quarter, while Albaraka Turk Katilim Bankasi AS, a Turkish Islamic bank, may make an offering this year, company officials said this week.
Spreads shrank in 2010 as debt restructuring in the Persian Gulf and government plans to spur investment by building roads, railways and bridges helped restore appetite for assets in the $1 trillion Islamic finance industry. Sukuk yields will rise this year along with interest rates globally, according to Kuala Lumpur-based CIMB-Principal Islamic Asset Management Bhd.
“Now’s a good time for issuers,” Zeid Ayer, who helps oversee $1.6 billion of Shariah-compliant assets at CIMB- Principal Islamic Asset Management, said in a phone interview yesterday. “There’s a healthy pipeline because issuers will likely take advantage of low funding costs and there’s expected to be more spending on infrastructure projects.”
Zeid’s company is a joint venture between Principal Global Investors LLC, a Des Moines, Iowa-based firm that manages more than $200 billion in assets globally, and Kuala Lumpur-based CIMB Group Holdings Bhd., the Southeast Asian nation’s second- biggest lender.
Albaraka Banking plans to sell as much as $500 million of sukuk after delaying in 2010, Adnan Ahmed Yousif, the chief executive officer, said in a telephone interview on Jan. 5 from Manama. Albaraka Turk Katilim Bankasi may offer at least $100 million of notes, Chief Executive Officer Fahrettin Yahsi said in an interview in Istanbul yesterday.
French companies, the central bank of the Palestinian territories and Thailand have also announced plans to borrow through Islamic debt this year.
Global sales of Islamic bonds, which pay returns based on asset flows to comply with the religion’s ban on interest, fell to $17.1 billion in 2010, from $20.2 billion a year earlier, according to data compiled by Bloomberg. Issuance reached a record $31 billion in 2007.
‘Access the Market’
Dubai World, one of Dubai’s three main state-owned holding companies, received approval from its creditors in October to change terms on $24.9 billion of loans. Nakheel PJSC, a property unit of Dubai World, is seeking to delay payments on at least $10 billion of loans and bills. The company is looking to gain clearance from creditors holding 95 percent of the debt by the end of March, according to an e-mailed statement on Jan. 2.
“It’s much easier to access the market after the removal of some of the uncertainties associated with debt restructurings along with spreads tightening,” Abdul Kadir Hussain, who manages $2 billion of assets as chief executive officer of Mashreq Capital DIFC Ltd., said in a phone interview from Dubai on Jan. 5. “In this environment issuance will rise.”
The spread between emerging-market sukuk and Libor narrowed 177 basis points last year to 290 as of Dec. 31, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Average yields dropped 252 basis points, or 2.52 percentage points, to 4.74 percent at the end of 2010, the HSBC NASDAQ Index shows.
Shariah-compliant bonds returned 12.8 percent last year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in emerging markets gained 12.2 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.
The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 rose five basis points to 3.03 percent today, according to prices from Royal Bank of Scotland Group. The rate has increased 10 basis points since the end of December. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s narrowed four basis points to 323 today, according to data compiled by Bloomberg.
Sales of sukuk this year will depend on the broader economic recovery, said Rafe Haneef, Kuala Lumpur-based managing director for global markets at HSBC Amanah, in an interview yesterday.
“If everything goes well, we probably can do better than 2010” in terms of sales, he said.
The International Monetary Fund estimates growth in Asia and the Middle East will outpace Europe and the U.S. this year. Asia may expand 6.7 percent and the Middle East and North Africa 5.1 percent, the IMF forecast in its latest outlook report on Oct. 6. The U.S. will grow 2.5 percent and Europe 1.8 percent, according to the Washington-based fund.
Saudi Arabia announced a five-year 1.44 trillion riyal ($384 billion) development plan in August to boost economic growth. Malaysia’s government has identified $444 billion in potential private sector-led projects that could be undertaken over the next decade, ranging from an underground rail system to a nuclear power plant.
“This year will be a good market for sukuk because companies are seeking funds to support expansion plans, as the global economy seems to be picking up,” said Rafe at the unit of HSBC Holdings Plc, Europe’s largest bank.
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