Saturday, August 21, 2010

SUKUK - Sukuk Four-Year Low Yields Fail to Deter Funds: Islamic Finance

Aug. 20 (Bloomberg) -- Islamic bond yields at four-year lows are failing to deter investors amid a flagging global recovery and dwindling new issuance of sukuk.

The average yield on dollar-denominated notes that comply with religious principles from Dubai to Malaysia fell 25 basis points, or 0.25 percentage point, so far this week to 5.22 percent, the lowest level since November 2005, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The yield has dropped 204 basis points this year.

Investors will flock to the bond market until they are more convinced about the strength of the world economy, according to Malaysia’s CIMB-Principal Islamic Asset Management Bhd. and OSK- UOB Unit Trust Management Bhd. Demand for sukuk in the Persian Gulf is starting to pick up as the credit crisis eases and companies restructure debt, improving the outlook for future issues, according to Dubai-based Duet Mena Ltd.

“There’s concern over the economy, whether it’s really gaining traction or not,” Zeid Ayer, who helps manage $1.6 billion as chief investment officer at Kuala Lumpur-based CIMB- Principal Islamic Asset, said in an interview yesterday. “People right now see bonds as a safe haven and there’s big appetite for sukuk because of the supply issue.”

Global sales of Islamic bonds fell 25 percent to $8.3 billion so far this year, according to data compiled by Bloomberg. A total of $20.2 billion was sold last year. Issuance may improve in the second half, led by first-time borrowers, Standard & Poor’s said in a statement on July 28.
‘Flight-to-Quality’

Government Islamic bonds have outperformed securities sold by companies this year and the trend is likely to continue, according to Kuala Lumpur-based OSK-UOB Unit Trust. Sovereign notes returned almost 10 percent, compared with an 8 percent gain in corporate debt, the HSBC/NASDAQ Dubai US Dollar Sukuk Indexes shows.

“When there are uncertainties about the global recovery we see a flight-to-quality, with more demand for sovereigns than corporates,” Mohd Noor Hj A Rahman, the head of the Islamic unit of OSK-UOB, which manages about 250 million ringgit ($80 million) of Shariah-compliant stocks and bonds, said in an interview yesterday.

The yield on Malaysia’s 3.928 percent Islamic note due June 2015 fell 13 basis points, or 0.13 percentage point, this week to a record-low 2.66 percent, and is down 27 basis points so far in August, according to prices from Royal Bank of Scotland Group Plc. Yields on sukuk sold by Indonesia, the world’s most- populous Muslim nation, dropped to an all-time low of 2.54 percent yesterday and declined 35 basis points this week.

Debt Restructuring

DP World Ltd., the port operator owned by Dubai World, reported first-half profit on Aug. 18 that beat economists’ forecasts and predicted earnings will be higher in the July-to- December period. The yield on the company’s dollar-denominated Islamic debt maturing in July 2017 fell 17 basis points this week to 7.18 percent, and has dropped 258 points from the year’s high of 9.76 percent on Feb. 15, according to data compiled by Bloomberg.

Dubai World, the state-owned company seeking to renegotiate the terms on $23.5 billion of debt, said in an e-mailed statement on July 22 it expects to complete the restructuring process in the “coming months” after a meeting with creditors.

“We are seeing a number of issuers successfully restructuring debt and new issues coming up with better credit quality, which will no doubt help attract more investors and help overall sentiment,” Rabih Sultani, who helps oversee $200 million as a fund manager at Duet Mena, said in an interview yesterday. “The performance of sukuk can be attributed to global factors, which are basically a rally in emerging markets.”

‘No Fundamental Reason’

Islamic bonds, which are backed by assets and pay a share of profits instead of interest, returned 3.9 percent this quarter, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. JPMorgan Chase & Co.’s EMBI Global Diversified Index, which monitors debt from 46 emerging-market countries, gained 7.7 percent.   The difference between average yields on Islamic bonds and the London interbank offered rate narrowed 18 basis points in the past four days to 380 and is down 63 basis points this quarter, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

Islamic Development Bank, the Saudi Arabia-based multilateral lender, plans to sell about $100 million in bonds in South Korea in its first sale of sukuk in the Asian nation, the Korea Economic Daily reported today, citing financial industry officials it didn’t identify. Malaysia Airports Holdings Bhd. has hired lead managers for issuance of 3.1 billion ringgit of notes, Chief Financial Officer Faizal Mansor told reporters on Aug. 17. 





The sukuk rally may continue unless the pace of issuance and size of offerings change, according to Hong Leong Islamic Bank Bhd. in Kuala Lumpur.

“We need to wait and see whether there is a pick-up in sukuk sales for any reason,” Jamil Baharuddin, head of bond trading at Hong Leong Islamic, said in an interview from Kuala Lumpur yesterday. “Otherwise, there is no fundamental reason that indicates an end to the rally.”

--With assistance from Haris Anwar and Dana El Baltaji in Dubai. Editor: Simon Harvey, Shanthy Nambiar.
To contact the reporter on this story: Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net; Khalid Qayum in Singapore kqayum@bloomberg.net;

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

http://www.businessweek.com/news/2010-08-20/sukuk-four-year-low-yields-fail-to-deter-funds-islamic-finance.html August 20, 2010

No comments:

Post a Comment