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: UAE FreeZone Newsletter - Issue 39 - July 2007 |
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| Foreigners dominate sukuk market
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| Western and Asian institutions hunting exposure to Gulf Arab economies are crowding Middle Eastern Muslims out of Islamic bonds or sukuk, turning on its head a market traditionally driven by religious and regional factors. |
Bankers estimate that global sukuk sales this year will range from $27 billion to $50 billion, up from $10.2 billion last year, according to ratings agency Moody's. |
As Islamic bond sales surge and yields fall, Middle Eastern investors are getting as little as 20 per cent of the increasingly large and complex new issues, which no longer suit small regional investment banks looking for high returns.
"Sukuk have had so much success that everyone in the world wants this product, so it's almost natural that the distribution now is about 20 per cent for the Middle East, 80 per cent elsewhere," Jean-Marc Le Jeune, a director at Barclays said.
In December last year, only 40 per cent of Dubai property developer Nakheel Group's $3.52 billion sukuk sale, the world's largest, was allocated to the Middle East, Barclays said.
Credit exposure
Subsequent sales have seen the fraction shrink to as low as 20 per cent, Barclays' Islamic banking chief Arul Kandasamy said.
"What conclusions can you draw? One is that investors want to have credit exposure to the Middle East, and the fact that it's a sukuk is neither here nor there," he said.
Last month, Dubai Ports World priced its non-convertible 10-year Islamic bond at 115 basis points over US Treasuries with only a quarter of the money raised coming from the Middle East.
In 2006 its parent firm, Dubai's Ports Customs and Free Zone Corporation (PCFC), priced its $3.5 billion two-year convertible Islamic bonds at 200 basis points over the equivalent US dollar swap selling 80 per cent in the region.
Bonds that can be later converted into stock usually offer lower returns, as do bonds with relatively short tenure.
Crucially, PCFC was not rated before going to market. "Islamic bonds were priced a little bit higher, there was a risk premium to be paid. That has disappeared... It's little a bit anecdotal, but I can assure you it's fact," Geert Bossuyt, head of Middle East structuring at Deutsche Bank said.
Sukuk comply with Islam's ban on interest and the trading of debt, and are backed by physical assets.
Initially driven by demand from the world's 1.2 billion Muslims for investments that comply with their beliefs, bankers say the instrument is now seen as a conventional one, attracting the world's conventional investors, who outnumber Muslim buyers.
Bankers' estimates for global sukuk sales this year range from $27 billion to $50 billion, up from $10.2 billion last year, according to ratings agency Moody's. Analysts forecast total investment grade European corporate bond issuance this year at up to 150 billion euros ($200 billion).
Strong interest
Strong interest from conventional investors has subsequently driven down the price of borrowing through sukuk, dampening interest among the Middle East's Islamic investors, who typically look for higher yields, bankers said.
At the same time, borrowers have increasingly sought a credit rating before selling sukuk, a procedure used to attract buyers by giving an indication of ability to repay debt.
The practice has further lowered prices, bankers said, and was a key reason why DP World's sukuk could offer lower returns than PCFC's, bankers said.
Islamic investors are also put off by the size and complexity of some larger sukuk sales. Many Islamic buyers are relatively small operations, who prefer to go for sukuk from small companies they know.
Despite the trend, some bankers feel Muslims will continue to be the market's main drivers, if not buyers. |
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Courtesy Al Nisr Publishing LLC
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