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Dubai’s sukuk rise most in year on debt accords

The yield on Dubai’s Islamic
bond fell the most in more than a year last week, leading a rally in
Arabian Gulf sukuk, as government-related companies complete debt
restructurings and posted better-than-expected earnings.

The yield on
Dubai’s 6.396 percent dollar sukuk due in November 2014 fell to a
record low 5.59 percent March 25, taking the weekly decline to 57 basis
points, the most since the week ended March 5, 2010, data compiled by
Bloomberg show. The difference in yield between Dubai’s Islamic note
and the Malaysian government’s 3.928 percent Islamic note due June 2015
dropped 72 basis points, or 0.72 percentage point, to 275, the lowest
on record, the data shows.

Dubai World,
the state-owned holding company that sought to alter the terms on about
$25bn of debt, signed a final accord with lenders last week,
overcoming investors’ concern the emirate may default on borrowings.
Government-controlled DP World Ltd, the world’s fourth-biggest port
operator, reported a 13 percent increase in profit last year as global
trade rose.

announcement of debt restructuring by Dubai World has obviously
improved sentiment toward the credit of both DP World and Dubai’s
government sukuk,” Akber Khan, a director at Al Rayan Investment in the
Qatari capital Doha, said in a telephone interview March 27. “Investors
are pricing in lower risk of Dubai government-related entities not
meeting their debt obligations.”

Average yields on Shariah-compliant debt in the six-nation Gulf Cooperation Council, which includes the United Arab Emirates
and Saudi Arabia, dropped 36 basis points, the most since the five days
ended Nov. 5, to 5.5 percent, according to the HSBC/NASDAQ Dubai GCC US
Dollar Sukuk Index. The extra yield investors demand to hold the debt
over the London interbank offered rate narrowed 48 basis points to 353.

The rate on DP
World’s 6.25 percent dollar-denominated Islamic bond due July 2017
declined 48 basis points last week to 6.4 percent March 25, the lowest
since Jan. 25, data compiled by Bloomberg show. The Dubai
government-controlled company’s profit rose to $374.8m in 2010, beating the $324.5m mean of 11 analyst estimates compiled by Bloomberg.

Fitch Ratings
assigned DP World a BBB- credit rating, the lowest investment grade,
with a stable outlook on March 23. The company is rated BB at Standard
and Poor’s and Ba1 at Moody’s Investors Service, both junk rankings.

“DP World
rallied last week as a result of receiving an investment grade rating
by Fitch, which means it can be purchased by a lot of accounts that
only buy investment grade paper,” Usman Ahmed, the head of fixed-income
at Dubai-based Emirates NBD Asset
Management, a unit of the UAE’s biggest bank, said in an interview
March 27. “They also posted solid earnings last week.”

economy, the second-biggest of seven that make up the UAE, is
recovering from the credit crisis, helped by a revival in trade and
tourism. Real gross domestic product expanded 2.2 percent in 2010 from
a year earlier, the statistics bureau said on its website March 21.
Economic growth is expected to accelerate to 4 percent this year,
according to Standard Chartered in December.

Dubai spent
billions of dollars since 2002 on developing its property industry and
transforming itself into a tourism, trade and financial-services hub.
In the process, the emirate and its state-owned companies ran up debt
of at least $129.3 billion, estimates by Credit Suisse Group show.
The emirate received a $20bn bailout from the Abu Dhabi
government and the UAE’s central bank in 2009.

entities still have significant debt maturing in 2011 and 2012, so
Dubai credit default swaps are still the highest in the GCC,” Al
Rayan’s Khan said.

swaps on Dubai’s government debt dropped 26 basis points last week to
404 on March 25, the lowest close since Feb. 9, according to CMA prices
in London. The cost of insuring debt from Bahrain, which has suffered
six weeks of unrest, fell 28 basis points to 330, the data show.

The yield on
Bahrain’s 6.247 percent sukuk due in June 2014 dropped 22 basis points
last week to 4 percent, according to data compiled by Bloomberg. Still,
investors demand a yield premium of 165 basis points to hold Dubai’s
Islamic notes rather than Bahrain.

Sales of
Islamic bonds from the GCC rose to $697 million this year from $450m in the same period last year, according to data compiled by
Bloomberg. Sukuk, or bonds that use asset returns to comply with
Islam’s ban on interest, from the region returned 2.1 percent so far
this month, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows. Debt
in developing markets gained 1.1 percent, JPMorgan Chase Co.’s
EMBI Global Diversified Index shows.

Bloomberg-AIBIM-Bursa Malaysia Sovereign Shariah Index, which tracks
nine of the most-traded ringgit-denominated government securities, was
at 101.816 March 25, compared with 101.756 a week earlier. The gauge
has gained 0.3 percent this month.

the developer of palm-shaped islands off Dubai’s coast, expects to
reach an accord with trade creditors on $10.5bn of debt in the
first half of this year. The developer owned by Dubai World said
restructuring agreements will be issued “shortly” to trade creditors
and the final term sheet to its bank coordination committee, according
to an e- mailed statement March 23.

“The Dubai
World debt deal has set a precedent for a real road map for any other
trouble with the government related entities,” Haissam Arabi, chief
executive officer at Gulfmena Alternative Investments in Dubai, said in
a telephone interview from Beirut on March 27.


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