Foreigners dominate sukuk market



Manama: 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.
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.
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).


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