Thursday, June 24, 2010

Dar al-Arkan swap, sukuk fund diversification

Dar al-Arkan, which issued a 10.5% sukuk in February to refinance its debts, has entered into a Shari'ah-compliant swap agreement to lower its financing costs. The arrangement swaps the current financing cost of 10.75% with a floating rate of 7.95% over 3-month SAIBOR (I would appreciate if someone could email me a source of SAIBOR rate data) for half of the sukuk, $225 million. The article discusses that the swap lowers the cost of financing, however, it should be remembered that if Dar Al Arkan is now exposed to interest-rate risk on this portion of the sukuk. If interest rates rise, the costs of the floating rate side of the swap to which Dar al-Arkan is exposed will rise. The sukuk matures in 2015 (the length of the swap was not included in the article) and interest rates are currently very low so if the swap covers the entire period of the sukuk, it could expose Dar al-Arkan to substantial additional financing costs.

European Finance House, an affiliate of Qatar Islamic Bank, released the performance of its EFH Global Sukuk Plus Fund. The performance was higher than its benchmark (3m USD LIBOR + 2%) by 780 basis points and the fund says it has experienced lower volatility than the sukuk markets as a whole in its first year. The article describes the diversification the fund was able to achieve across 13 sukuk in nine jurisdictions. This is not surprising, but it is also not very diversified. This is not a problem specific to this one fund; there are far too few sukuk that are available for sukuk funds. Until the growth in sukuk issuance increases--and it has rebounded this year--it will be difficult for sukuk funds to achieve diversification anywhere comparable to conventional bond funds. For comparison, one of the world's largest bond funds, the PIMCO Total Return Fund, has 11,619 holdings according to Morningstar.

Other News

  • The Dubai bailout has increased demand in secondary markets for GCC-based sukuk.
  • Gas pipeline company Trans Thai Malaysia, a joint venture of Petronas and PTT pcl, is likely to issue a sukuk.
  • Bank Negara Malaysia, on behalf of the government, issued MYR2.4 billion ($743 million) of three-year Sukuk 1Malaysia notes with a 5% coupon. The transaction was facilitated through Bursa Suq Al-Sila', the commodity murabaha platform.
  • Pakistan's government plans to issue $410 million in short-term (1-, 2- and 3-year) sukuk shortly once it receives government approval from the Sindh government and the Ministry of Defense. The sukuk will be based on land at a terminal at the Karachi airport.
  • An article in a Turkish newspaper describes sukuk. The description included: "Sukuk are not debts of the issuer". This is technically correct because even asset-based sukuk involve the transfer of beneficial ownership, however, they are structured to be treated pari passu with the unsecured debts of the issuer and often provide recourse to the issuer through a purchase undertaking.

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