Islamic bond offerings may accelerate in the next 18 months, led by first-time issuers in Asia after the region accounted for most sukuk sold this year, Standard & Poor’s said.
While issuance of securities that comply with Shariah law are down 17 percent globally this year, Asian borrowers issued $5.3 billion, about 68 percent of the total $7.8 billion worldwide, according to data compiled by Bloomberg. Sales from companies in the Persian Gulf dropped 24 percent to $2.5 billion so far in 2010, the lowest level since 2005, after Dubai World, one of the United Arab Emirates three main state-owned business groups, announced plans to restructure debt in November.
“Sovereigns, particularly from Asia, are pushing for the revival of the sukuk market,” Mohamed Damak, Paris-based credit analyst and co-chair of the Islamic finance working group at S&P, said in an interview. “We expect additional countries, or issuers domiciled in countries new to Islamic finance to tap the sukuk market in the near future, within the next 18 months.”
Khazanah Nasional Bhd., Malaysia’s state investment company, sold S$1.5 billion ($1.1 billion) of Islamic bonds, its first in Singapore, the company said in a statement late yesterday. The Philippines’ state-owned Al-Amanah Islamic Bank is exploring a sale, the lender’s President Armando Samia said on July 26.
Economic growth in developing Asia, including Malaysia and Indonesia, will accelerate to 9.2 percent this year from 6.9 percent in 2009, while Middle Eastern economies may expand 4.5 percent compared with 2.4 percent, according to estimates by the International Monetary Fund on July 7. Governments are tapping local and international sukuk markets to help set benchmark rates for corporate bond sales.
The debt is typically backed by assets or cash flow because Islamic law bars payment of interest. Investors earn any profit from the assets instead.
The extra yield investors demand to hold Dubai’s dollar sukuk rather than Malaysia’s 3.928 percent Islamic note due June 2015 has widened 42 basis points to 417 basis points since June 2, according to data compiled by Bloomberg.
The yield on the Dubai Department of Finance’s 6.396 percent sukuk due in November 2014 fell four basis points to 7.04 percent yesterday, the lowest level since Nov. 25, Bloomberg data show. The difference over similar-maturity U.S. Treasuries has widened 194 basis points to 406 since the debt was sold in October.
The spread between the average yield on emerging-market sukuk and the London interbank offered rate, has narrowed 60 basis points to 383 since the end of June, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The difference reached this year’s low of 369 on April 15.
The debt returned 9.3 percent this year, according to the Index, while bonds in developing markets gained 10.8 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.
The average yield on sukuk sold by Gulf borrowers widened 100 basis points to 6.5 percent since a Nov. 18 low, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index.
Dubai World, which is renegotiating terms on $23.5 billion of liabilities, said on July 22 it expects to complete the agreement in “coming months.” Property unit Nakheel PJSC, which held a separate meeting with its lenders July 14, said a group of creditors representing banks “unanimously supported” a proposal on terms of $10.5 billion of loans and unpaid bills.
“The increased risk aversion and wider spreads have made it a relatively expensive time to borrow,” Khalid Howladar, a Dubai-based senior analyst at Moody’s Investors Service, said in an interview on Aug 2. Issuance in the second half of 2010 will be “not much above where we are now, a couple of issuances maybe, but more likely in Asia rather than in the Gulf.”
Malaysia, the world’s biggest market for Islamic bonds, raised $1.25 billion in May from the year’s biggest sovereign sale of Islamic debt that complies with Shariah principles. Twenty-six companies from Malaysia raised 9.6 billion ringgit ($3 billion) from local currency sukuk sales this year, according to data compiled by Bloomberg.
Policies to promote assets that follow Islamic law are spreading beyond nations with a Muslim majority to Europe and Japan. Singapore’s government started a S$200 million sukuk issuance program in January 2009, which was set up to help provide financing to banks offering Islamic services, according to the Monetary Authority of Singapore.
State-run Islamic Bank of Thailand plans to raise $155 million by the fourth quarter, President Dheerasak Suwannayos told reporters in Bangkok on July 2. Indonesia, with the world’s largest Muslim population, raised $650 million from its first international Islamic dollar bond sale in April last year.
Kazakhstan, the former Soviet republic that last sold international debt in 2000, is planning a debut Islamic bond offering to broaden its investor base, Aibek Bekzhanov, head of Islamic instruments at the Regional Financial Center of Almaty, said July 27.
“Some countries clearly want to develop Islamic finance locally,” S&P’s Damak said. “They are also aiming to develop necessary tools, like a yield curve, that private sector issuers can benchmark themselves against.”
The “revival” of the sukuk market will depend on the “restoration of confidence among financial institutions and renewed interest in asset-backed structures,” said Harald Eggerstedt, head of credit research at RIA Capital Markets Ltd., an Edinburgh-based securities broker and advisory company that buys corporate bonds from the Persian Gulf including Islamic debt for wealth managers.
“Credit uncertainties made many of the yield mark-up levels look insufficient and when liquidity declined this re- enforced the perception sukuks aren’t good value,” Eggerstedt said in an interview on Aug. 2. “We will need higher yields and sufficient liquidity for a broader range of investors to come back to the market."
source : Bloomberg