The yield premium on Indonesia’s sovereign sukuk over non-Islamic bonds is down 58 percent since the bonds were sold in April 2009, while Malaysia’s debt rallied to a record as investors gain confidence in the securities.
The difference in yield between Indonesia’s 8.8 percent Islamic debt due April 2014 and notes maturing the same year that don’t adhere to the religion’s ban on interest narrowed to 37 basis points, or 0.37 percentage point, from 87 at the time of issue, according to prices from the Royal Bank of Scotland Group. The yield on Malaysia’s 3.928 percent sukuk due June 2015 dropped 45 to 3.39 percent since it started trading May 28, prices from HSBC Holdings Plc show.
Sukuk from Asian nations are rallying before $5.8 billion in planned sales in the region this year, including a 1 billion ringgit ($312 million) offering from Kuala Lumpur-based Cagamas Bhd., Malaysia’s biggest mortgage buyer. Indonesia chose three banks yesterday to manage the sale of as much as $650 million in Islamic bonds in October after securing credit ratings upgrades from Standard & Poor’s Corp. and Moody’s Investors Service in the past year as the economy recovered.
“Investors look at Indonesia favorably and there’s no bad story hanging over it,” Cornel Bruhin, a Zurich-based fund manager at Clariden Leu AG, which owns the country’s sukuk in its $377 million Emerging Markets Bond Fund, said in an interview yesterday. “There’s the prospect it will become an investment grade” issuer, he said.
Indonesia Ratings
S&P upgraded Indonesia’s credit rating to BB in March, two levels below investment grade, while Moody’s raised its ranking in September 2009 to Ba2, also two notches below.
The yield on Indonesia’s dollar-denominated Islamic notes fell to a record low of 3.67 percent today, compared with 8.37 percent at the time of issue, and returned 26 percent since the sale on April 17, 2009, according to RBS prices. The HSBC/NASDAQ Dubai US Dollar Sukuk Index, made up of Islamic bonds from Indonesia to Saudi Arabia, gained 15 percent in the same period.
Economic growth in developing Asia, including Malaysia, China and Indonesia, will accelerate to 9.2 percent this year from 6.9 percent in 2009, while Middle Eastern economies may expand 4.5 percent compared with 2.4 percent, according to estimates by the International Monetary Fund on July 7.
Indonesia hired HSBC Holdings Plc, Standard Chartered Plc and Citigroup Inc. to manage its second overseas offering of sukuk in October, a finance ministry official, who asked not to be identified because discussions are private, said yesterday.
Stable Economies
“The economy is much more stable in this part of the world,” Mohd Farid Kamarudin, who helps manage 1.3 billion ringgit of Shariah-compliant assets at AmInvestment Management Sdn., said in an interview from Kuala Lumpur yesterday. “I definitely would prefer” Asian sukuk and “try to avoid Dubai for now as the country fundamentally still has some debt issues,” he said.
The extra yield that investors demand to hold Dubai’s dollar sukuk rather than Malaysia’s has widened 28 basis points since May 28 to 408 yesterday, according to data compiled by Bloomberg. Malaysia raised $1.25 billion from its first sale of the debt in eight years on May 27 and attracted bids for more than five times the offer of $1 billion.
The average yield on sukuk sold by Gulf borrowers rose 155 basis points to 7.31 percent since its Nov. 18 low, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The similar yield on the HSBC dollar sukuk index, which tracks the overall performance of Islamic debt, widened 60 basis points in the same period to 6.10 percent.
Dubai Risk
Asian sukuk generally performed better than Persian Gulf issues in the past year after Dubai World, one of the United Arab Emirates three main state-owned business groups, unveiled plans to restructure debt in November. Kuwait’s Investment Dar Co. was the first company from the region to default on a $100 million sukuk in April last year.
Investors who differentiate Gulf issuers can see that “Dubai is still having difficulties and the banks have balance- sheet issues,” compared with those in Abu Dhabi or Qatar, Bruhin at Clariden Leu said.
Nakheel PJSC, a unit of Dubai World that’s seeking more time to repay $10.5 billion of liabilities, plans to offer lenders interest of 4 percentage points more than benchmark rates today, two bankers with knowledge of the plan, who asked not to be identified because the matter is private, said yesterday. Dubai World and its seven-biggest lenders will present its restructuring plan to almost 70 creditors on July 22, a person familiar with the matter said on July 11.
The yield on the Dubai Department of Finance’s 6.396 percent Islamic note maturing in November 2014 has increased 106 basis points to 7.47 percent since it started trading in October, according to data compiled by Bloomberg.
“We are of the view that there is declining risk of default in Dubai,” said Mohd Farid. “However, there remains high possibility of rating downgrades for Dubai issuers particularly for the financial institutions.”
http://www.bloomberg.com/news/2010-07-14/falling-asian-sukuk-premium-shows-confidence-before-sales-islamic-finance.html
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