Friday, October 12, 2012

Global Islamic Finance: Gulf Sukuk Beat Loans for First Time Since ...

Persian Gulf Islamic bond sales are beating Shariah-compliant loans in the Middle East, Europe and Africa for the first time since 2006 as borrowers seize on tumbling yields to finance roads and airports.

Sales of sukuk in the Gulf Cooperation Council have almost quadrupled this year to $18.5 billion as Saudi Arabia?s state- run Civil Aviation Authority and Qatar?s government sold $4 billion each, according to data compiled by Bloomberg. Loans that comply with Islam?s ban on interest, by comparison, have risen 57 percent to $11.4 billion in EMEA.

Borrowers in the GCC, home to about a third of global oil reserves, will rely more on Islamic bonds after yields dropped to a record, Standard & Poor?s said in a report on Oct. 8. GCC sukuk sales make up about half of this year?s record $38.3 billion of global sales. The average yield on global sukuk fell 103 basis points, or 1.03 percentage points, in the period to a record 2.96 yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

?Sukuk are becoming a legitimate competitor for traditional Islamic loans and you will see them staying like that for a while,? Abdul Kadir Hussain, chief executive officer of Mashreq Capital DIFC, which had $265 million in assets under management in June, said by phone from Dubai yesterday. ?It?s now a product that is more known to investors and issuers.?

?FERTILE ENVIRONMENT?

Qatar International Islamic Bank (QIIK) and Riyadh-based Kingdom Holding Co. (KINGDOM), the investment company of Saudi billionaire Prince Alwaleed bin Talal, are among those that plan to tap the sukuk market. The yield on GCC Islamic bonds slid 121 basis points this year to 3.1 percent, according to the HSBC/NASDAQ. It fell to a record 3.08 percent Sept. 14.

Increased crude production and ?robust? growth in the non-oil economies will lift economic growth among oil exporters in the Middle East and North Africa to 6.6 percent this year from almost 4 percent in 2011, the International Monetary Fund said in its World Economic Outlook report yesterday.

Economic expansion creates a ?fertile environment for credit growth, particularly in the Gulf?s oil-exporting economies,? according to S&P, which rates Qatar and Abu Dhabi AA, the third-highest investment grade and one level above Saudi Arabia, the world?s biggest oil exporter.

?We also expect the project finance sector, including real estate and transport projects, to increasingly rely on sukuk issuance to fund transactions,? said S&P?s credit analyst Karim Nassif.

SAUDI ISSUES

Companies and government agencies in Saudi Arabia, the biggest Arab economy, have raised a record $8 billion from sukuk this year as the state spends more than $500 billion to create jobs, build airports, roads and houses. The aviation authority said in May it plans to issue a second tranche of sukuk to fund the expansion of Riyadh?s airport. Kingdom Holding secured shareholder approval in March to raise as much as 3.75 billion riyals ($1 billion).

Qatar Islamic Bank SAQ (QIBK) raised $750 million from the sale of dollar-denominated sukuk this month at the lowest rate for similar sales by GCC banks this year. Qatar International Islamic Bank said Oct. 4 it mandated HSBC Holdings Plc, Standard Chartered Plc and QNB Capital for a possible sale of dollar- denominated debt.

Shariah-compliant bonds pay returns based on asset values because of the religion?s ban on interest and often involve a sale and purchase agreement. The debt structures need to be reviewed and approved by Shariah scholars to ensure they comply with the religion?s finance rules.

CHALLENGES

Challenges of arranging the securities? structure ?are very much still there? and the industry needs to widen its investor base beyond banks, said Hussain of Mashreq Capital. Tamweel PJSC (TAMWEEL) said in July ?market feedback? prompted the Dubai-based provider of Islamic home loans to cancel the sale of $235 million in residential mortgage-backed bonds, abandoning what would have been the first such transaction in the Middle East since the onset of the global credit crunch.

Sales of sovereign Islamic bonds in the Middle East have been limited to Qatar, Dubai, Ras Al Khaimah and Bahrain, according to data compiled by Bloomberg.

The yield on Dubai?s 6.396 percent sukuk due November 2014 tumbled 273 basis points this year to 2.85 percent today, data compiled by Bloomberg show. The premium investors demand to hold Dubai?s sukuk over Malaysia?s investment-grade 3.928 percent notes maturing in June 2015 narrowed 148 basis points this year to 139 today, the data show.

Sukuk pricing ?right now is very good for issuers,? Samer Mardini, vice president of fixed-income and Islamic finance products at Dubai-based SJS Markets Ltd, said by phone Oct. 9. ?Sukuk issuances are going strong now and will continue to do so in the future.

(Bloomberg News / 10 Oct 2012)

Source: http://www.global-islamic-finance.com/2012/10/gulf-sukuk-beat-loans-for-first-time.html

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