Debt concerns slow Islamic issuance

Gulf firms delay sukuk offerings because of wariness over existing obligations, says analyst.

MANAMA // Companies in the Gulf want to raise up to US$4 billion (Dh14.69bn) with Islamic bonds, but are waiting for conditions to improve as Dubai World restructures its $26bn debt and sentiment recovers after the large defaults last year in Kuwait and Saudi Arabia, a senior Bahrain-based banker says. "In the GCC there are so many deals in the pipeline, just waiting for the right time," said Nabeel Ali, a senior vice president at Unicorn Investment Bank in Bahrain. The firm helped the Saudi property company Dar al Arkan raise $450 million with an Islamic bond this month, the first in the region since Dubai World said last year it would seek a debt restructuring. "They're waiting for the courage of the client and the [investment banks] to bring the deal to the market," Mr Ali said. "No one wants to bring a deal and then it's a failure."

The health of the region's Islamic bond market is seen as vital in the long run as companies look to borrow money for large projects in the absence of financing from banks. With the growth of Islamic finance - the assets of Islamic banks expanded to $822bn last year, according to a Standard & Poor's report, a rise of more than 28 per cent from the previous year - Sharia-compliant instruments are seen as a potential avenue for companies to raise money.

Globally, about $23.3bn of Islamic bonds, or sukuk, were sold to investors last year, an increase from the $14.9bn issued in 2008. Yet about 64 per cent of the debt came from Asia, and only one sukuk has come to the market in the GCC this year: the $450m Dar al Arkan sukuk, which came with a five-year term and an 11 per cent profit rate. While companies and governments raised money through the early part of last year, Dubai World's problems, coupled with wariness among foreign investors for GCC debt, have strained the growth of the sukuk market, and by extension have dampened the ability of companies to raise money. Several planned sukuk issuances, including a recent one from Indonesia, have even been postponed or cancelled this year because the yields investors were demanding were too high.

UAE banks have exposure of about Dh55bn to Dubai World, Moody's Investor Service said yesterday. "In some respects we're back to where we were in March of last year, where in order to open the market for sukuk and conventional lending you'll probably need to get a couple big sovereign issuers [such as Abu Dhabi or Qatar] to the market raising money," said Abdul Kadir Hussain, the chief executive of Mashreq Capital in Dubai. "Right now it's kind of flat-ish and not really going anywhere, and one reason is we're trying to figure out when this whole Dubai issue will clear up."

In the absence of big chunks of government debt, Mr Ali said the Dar al Arkan sukuk, which the Saudi property company plans to use to finance current and future projects, would set a "benchmark", and that yields this year would need to be higher to entice investors. "There are pockets of money in the GCC and across the globe," he said. "If you want to tap into those pockets of money, you need to entice them. I know there are a couple of deals in the pipeline where people are ready, even offering circulars are ready, but they are just waiting for the right time to launch. The same thing happened to us with Dar al Arkan. We were ready to launch in December, but Dubai happened, and we didn't think it was the right time."