Thursday, May 21, 2009

Sukuk markets 'recover'? DIB buyback, FTSE Yasaar index in Thailand, TID denies bailout.

Trowers and Hamlin, a law firm involved in the Islamic finance industry compiled a number of interesting statistics about the sukuk market, which has rallied 29% since February:
"Since the market's darkest day on February 11 the average yield on corporate GCC sukuk has fallen from 17.2% to 10.1% and the average credit spread over LIBOR has narrowed from 1,414 to 763 basis points."
Although the improvement in prices and drop in yields is a positive for sukuk issuance later this year, the explanation that the rally was due to optimism in caoital markets and governments in the GCC providing support to the issuers is only part of the picture. As I have tried to demonstrate by looking at two individual sukuk, Jebel Ali Free Zone (JAFZ) and Nakheel (which should be followed soon by a third on The Investment Dar sukuk on which the company defaulted). The two pieces highlight differences between sukuk, but focus on the lack of liquidity in sukuk secondary markets which makes them very volatile. One of the primary causes of this illiquidity is the shortage of sukuk which leads buyers to adopt a 'hold-to-maturity' position at greater levels than in conventional bond markets because there is unlikely to be another new sukuk to reinvest the proceeds from any sale. This is particularly true when new issuance has plunged, as it did during 2008 and the first quarter of 2009.

The Dubai Islamic Bank finished the first sukuk 'buy back' of $50.62 million at 88% of par value.

In response to earlier media reports that the Kuwaiti government was planning a bail out of The Investment Dar, the company released a short simple statement: "The Investment Dar Co. K.S.C.C. confirms that no negotiations are being held regarding a bail out by or other funding from the Central Bank of KuwaitCentral Bank of Kuwait, contrary to recent media speculation."

FTSE Yasaar launched its newest Islamic index, this one providing an index benchmark for the SET in Thailand.

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