Sukuk issuance still going strong

The Emirates Airline sukuk will be the second time the carrier has tapped fixed interest markets in the past few months. Jeff Topping / The National

The wave of sukuk issuance continued to wash over the Dubai financial markets yesterday, even as some experts warned that future global demand for Islamic bonds might be limited.

Dewa, the Dubai utilities company owned by Investment Corporation of Dubai (ICD), listed a US$1 billion (Dh3.67bn) sukuk on the Nasdaq Dubai market, while Emirates Airline set off on an investor roadshow ahead of what is expected to be another big sukuk issue later this month.

That follows the news that Dubai Islamic Bank had hired banks to prepare for a high yield sukuk to raise in the region of $500 million.

Last week, Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, committed the emirate to become the global hub of the $300bn market in Islamic bonds.

However, investment banks including Bank of America Merrill Lynch, Société Générale and Coutts have called into question whether the gains made by sukuk during the rally of the past two years can continue. Inflation and interest rates, currently at record lows, are expected to rise as the global economy recovers from the financial crisis - making fixed income appear unattractive compared to equities. Total returns on the HSBC/Nasdaq Dubai GCC US dollar sukuk index have increased just 0.6 per cent this year, while global equities have rallied sharply.

The Dow Jones Industrial Average hit a record high on Tuesday, while European stocks are at a four-and-a-half year high.

So far, those doubts do not appear to have affected the Dubai market. The Dewa sukuk, which represented a return to debt markets by the utility company after an absence of more than two years, attracted orders of $5bn with most of that, around 65 per cent, coming from the Middle East.

The five-year debt carries a profit rate of 3 per cent for investors.

Some experts believe there is still substantial demand for sukuk, especially from Dubai and listed on local markets.

Ahsan Ali, the head of Islamic origination for Standard Chartered, said: "There has been a lot of activity recently, driven by the liquidity there is in the market and by the attractive pricing for issuers. With yields on a downwards trend, issuers can lock in low rates for the long term.

"And it makes increasing sense for those issuers to list on Dubai markets, the infrastructure is there.There is still plenty of demand out there, not just from the Middle East but from Europeans who are seeking a diversification strategy."

The Emirates sukuk will be the second time the airline has tapped fixed interest markets in the past few months. In January it raised $750m from a conventional bond listed in London.

It is not yet known where Emirates will chose to list, but given the recent official initiative it looks certain it will opt for a listing on either Nasdaq Dubai or the Dubai Financial Market.

ICD, the emirate's premier investment vehicle, was also recently reported to be considering a foray into the sukuk market.

Dubai itself raised $1.25bn in January, a mix of conventional fixed interest instruments with a $750m Islamic tranche.

Sukuk issuance has been the first part of the strategy announced in January by Sheikh Mohammed to develop Dubai as a hub of the global Islamic economy, along with other Islamic financial industries as well as halal food and cosmetic production.

Over the past couple of years, Dubai has slipped to third place in the global sukuk leagues, behind London and Malaysia.

Essa Kazim, the chairman of Borse Dubai, which owns the emirate's financial markets, said recently that if Dubai government and related companies issued debt in sukuk, and listed them on local rather than overseas markets, it would make the emirate the leader in word sukuk listing.