Islamic financial institutions (IFIs) face a significant hit on profits if real estate prices continue to fall in the Middle East according to ratings agency S&P. IFIs' direct exposure to real estate assets in 2008 reached 20 % of total loans, making them vulnerable to an ongoing correction, especially in Dubai.
Unlike their conventional counterparts, IFIs remained immune to price falls in structured products, which prompted write-downs all over the world, the report said.
John Aglionby reported on 23 February in the Financial Times that Indonesia is planning further after seing the first retail Sukuk being an outstanding success raising Rp 5,556bn (USD 466 mn) compared with the target of Rp 1,700 bn. The coupon rate is fixed at 12 per cent over three years and is paid monthly.
USD denominated Sukuk to retail investors and medium-term notes, the latter expected to be in the region of USD 3 bn, are still under consideration. The global sukuk and medium-term notes have been delayed after a successful international roadshow this month, pending parliamentary approval for the government’s revised budget.
Fitch Ratings released that the recent announcement of a USD 20 bn bond programme is improving the overall liquidity which will be positive for government-linked corporates facing the need to refinance maturing debt at a time when the impact of regional economic conditions, especially in the construction and property sector, are becoming increasingly negative.
Official figures put Dubai government and state-owned corporate debt at USD80 bn, of which Fitch estimates that around USD11 bn of foreign currency debt matures during 2009. Last week Borse Dubai raised USD2.5 bn in financing, and received an equity injection of USD1 bn from its shareholder, Investment Corporation of Dubai, to refinance an aggregate USD3.8 bn loan (part of the 2009 maturities).
Moody's Investors Service said on Monday the Dubai's government's USD 20 bn 5-year, 4 % bond programme could support debt ratings of Dubai companies that were placed under review for a downgrade earlier this month. If there are no restrictions on how Dubai uses bond proceeds this could support Moody's ratings of Emaar, DP World, DIFC Investments, Dubai Holding Commercial Operations Group, Dubai Electricity and Water Authority and the Jebel Ali Free Zone. Moody's had said it could lower its debt and Islamic bond, or sukuk, ratings for the six firms, all linked to the Dubai government, by as much as two notches each. The review is due shortly.
Earlier the month the law firm Ashurst announced the formation of their Islamic finance restructuring team. Now Lovells advertises to their prospective clients being a "global player in Business Restructuring and Insolvency". It seems that supply follows demand due to the ongoing crisis.
Muhamad Al Azhari & Dion Bisara reported on 24 February in The Jakarta Globe that Indonesia raised Rp 5.56 trillion ($467 million) from the sale of the country’s first retail Islamic bonds, or retail sukuk , beating the sales target due to strong demand from investors, according to the finance minister.
The government initially aimed to raise Rp 1.77 trillion through the debt paper sale, but later raised that target to Rp 3.7 trillion as demand appeared to be strengthening. A 12 % of return was offered for the bonds, higher than premium-grade bank deposit rates of about 10 percent for preferred customers.
The debt papers were sold at a par, or face value, of Rp 1 million per unit, with a minimum purchase of Rp 5 million. The sukuk has a fixed payout on the 25th of each month and matures on Feb. 25, 2012.
According to a report of Global Investment House more than 100 Sukuk equivalent to more than USD 38 bn are awaiting issuance if markets recover.
DIB Capital, a 100 % subsidiary of Dubai Islamic Bank, sees the long term prospect as strong for the Sukuk market according to Nadeem Lodhi, head of capital markets and syndications. Also they are planning to launch a Sukuk fund.
Mushtak Parker writes in Arab News on 23 February that the Hong Kong Special Administrative Region government is finalizing new tax laws which would facilitate the introduction of Islamic finance on a par with equivalent conventional products, and there is a strong possibility that the Hong Kong Airport Authority (HKAA) will issue the debut quasi-sovereign Sukuk from the island enclave during 2009.
However, Hong Kong is concerned about the effect on Islamic finance of the credit crunch and the global financial crisis, since no economy, including those in the Middle East and GCC (Gulf Cooperation Council) countries, have gone untouched. Thus it seems unavoidable that Islamic finance will slow its pace of development in the near term, "alongside growing downside risks in the global financial scene."
Borse Dubai Limited announced today that it has successfully signed a USD 2.5 bn Term Facility to refinance the aggregate USD 3.8 billion Term Credit Facility used to fund investments into NASDAQ OMX. The multicurrency syndicated facility matures in one year and carries a one-year extension option, at the discretion of Borse Dubai. The facility has a conventional and Islamic tranche, and pays 325 basis points p.a over the London interbank offered rate (Libor).
The participating banks include Bank of Baroda, Dubai Islamic Bank PJSC, Emirates Bank International PJSC, HSBC Bank plc, Industrial and Commercial Bank of China (Asia) Limited, ING Bank N.V., London Branch, Intesa Sanpaolo - Dubai Branch, National Bank of Abu Dhabi PJSC, Skandinaviska Enskilda Banken AB (publ), The Bank of Tokyo-Mitsubishi UFJ Ltd. and Union National Bank, majority of whom are existing Borse Dubai financing firms.
Rachna Uppal reported on 16 February that the UK Sterling Sukuk will be offered in the foreseeable future. There is work ongoing on the issue how t o treat the coupon of the Sukuk and put it on par with bonds.
Indonesia plans to issue regular domestic Sukuk Al Ijara with a maturity of 5 years or more according to the finance ministry. The currency is not yet decided.
Sean Davidson wrote on 13 February in Business 24/7 about the importance of an active sovereign bond market to strengthen Gulf monetary policies allowing for an integrated market for local currency government bonds where the central, local and forweign banks, individuals and other institutional investors can participate - a matter which plenty of economists agree to.
The UAE government has indicated plans to issue conventional bonds and sukuk in the near future with maturities of up to 30 years.
Heiko Hesse, Andreas Jobst and Juan A. Sole published on RGEmonitor on 13 February an analysis regarding Islamic Securitization and the grown interest for Islamic finance during the financial crisis.
Islamic finance is driven by the general precept of extending religious doctrine in the shari’ah to financial agreements and transactions. Predatory lending, deteriorating underwriting standards, and a series of incentive problems between originators, arrangers, and sponsors, of which all have infested the conventional securitization process, belie fundamental Islamic principles.
The article linked in the source relates the characteristics of this form of securitization to calls for enhanced disclosure and standardization, ratings agency reforms, and better transparency of origination and underwriting practices in conventional structured finance. In particular, it assesses the potential of conflicts of interest (which became apparent in the U.S. subprime mortgage crisis) to contaminate the integrity of the securitization process if it were conducted in compliance with shari’ah principles.
Soren Billing reported on 10 February in Arabianbusiness that credit default swaps for Mideast lenders have risen substantially led by Bahrain, spreads have widened by 174.2 basis points (bps) in the last three months, followed by Saudi Arabia (114.8 bps), Abu Dhabi (96.7 bps) and Qatar at (70 bps), Corporates in the region have been hit even harder. The CDS spreads on Dubai based companies range between 600 bps and 1,100 bps, which is significantly higher than on Abu Dhabi based corporations, which range between 250 bps and 400 bps. The yield on Nakheel’s Sukuk that matures on Dec. 14 this year reached 41.9 % from 27.7 % a month ago.
Cecilia Valente and Frederik Richter reported 10 February on Reuters, that Western companies, especially in the UK and France, are considering issuing Sukuk to tap Middle Eastern investors.
PLUS Expressways Bhd, Malaysia’s largest toll-road operator, plans to sell RM 1 bn, 5-year Sukuk to help repay maturing debt and finance expansion projects. Bank Islam Malaysia Bhd and CIMB Islamic Bank Bhd supports the sale of the Sukuk. The company aims to raise RM 350 mn in the coming months to refinance debt maturing in June and to raise another RM 200 mn in the second half of the year to fund a road project in Indonesia.
Abu Dhabi Islamic Bank (ADIB) is issuing a Tier 1 capital Sukuk to the government of Abu Dhabi, raising AED 2 bn (USD 545 mn). The issuance of the Sukuk was approved by ADIB's board of directors on 3 February 2009, and will be subject to obtaining shareholder approval. The Sukuk will pay an expected return at a rate of 6 % per annum, payable semi-annually in arrears from (and including) the issue date for a period of 5 years, and thereafter at a rate, reset and payable semi-annually in arrears, reflecting the initial margin above the then prevailing six month Emirates Interbank Offered Rate.
Tirad Mahmoudis the Chief Executive Officer of ADIB.
Noor Islamic Bank topped the 2008 Bloomberg list of leading Sharia’ah compliant Lead Arrangers in the UAE and ranked third on the list of leading Islamic finance Book Runners in the country in its first year of operation.
Hussain Al Qemzi is the CEO of Noor Islamic Bank.
Ashurst has formed a multidiscipline team of lawyers from across its global network to assist clients with Islamic finance restructuring and Sharia compliant distressed financings. This comes as a result of increasing client demand for assistance with Sharia compliant transactions and investments that require restructuring due to current market conditions.
Moody's may downgrade its debt and Sukuk ratings of six Dubai companies, including DP World and Emaar Properties by as much as two notches each following a review in the coming weeks.
In addition to Emaar and DP World, Moody's said it was reviewing ratings of DIFC Investments, Dubai Holding Commercial Operations Group, Dubai Electricity and Water Authority (DEWA) and the Jebel Ali Free Zone (JAFZA).