Business | Investment
Islamic bonds beaten by emerging debt for fourth month
New sales after Ramadan will help boost trading, says analyst
- Bloomberg
- Published: 00:00 September 4, 2010
Dubai: 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 Arabian Gulf companies restructure their debt.
Shariah-compliant notes rose 1.4 per cent last month, down from 2.6 per cent 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 per cent, 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.
New sales after Ramadan ends in mid-September will help boost trading, said CIMB-Principal Islamic Asset Management and Exotix.
Immediate catalyst
"The most immediate catalyst to a recovery would come in November when Dubai World's restructuring should be concluded," Ahmad Al Anani, an associate director for the Middle East and North Africa at Exotix, an investment bank specialising in illiquid assets, said in an interview in Dubai on September 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 (Dh86 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."
Global sukuk sales fell 12 per cent 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.
"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 US-based Principal Global Investors and Malaysia's CIMB Group Holdings. Bondholders may have to wait "quite a bit" before they can realise gains, he said.
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 reorganise its debt.
The extra yield investors demand to hold the Dubai Department of Finance's dollar sukuk rather than Malaysia's 3.928 per cent Islamic note due June 2015 widened four basis points to 412.5 basis points in August, according to Royal Bank of Scotland Group data. The gap has narrowed to 390 since.
Sukuk returned 10.2 per cent in 2010, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing nations gained 12.8 per cent, EMBI Global Diversified Index showed.
Returns on Islamic notes from Gulf issuers slowed in August on conflicting signals over progress in repaying debt.
Dubai World-controlled property company Nakheel said earlier this year it plans to offer tradable sukuk to repay part of its debt.
Nakheel aims to settle Dh1.5 billion 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 August 11 placed the Ba2 credit rating of Dar Al Arkan Real Estate Development, Saudi Arabia's biggest property company by market value, on review for a possible downgrade.
The yield on Dar Al Arkan's 10.75 per cent sukuk maturing in 2015 rose to 10.37 per cent in August from 10.12 per cent at the end of July, according to prices compiled by Bloomberg. It yielded 10.25 per cent yesterday. The yield on Nakheel's 2.75 per cent notes due January 2011 added five basis points to 15.77 per cent last month.
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