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Greed and fear hold back Gulf Islamic bonds: LMC

Tue Feb 5, 2008 1:17pm EST

By Mohammed Abbas

MANAMA (Reuters) – Greed and fear linked to the subprime debt crisis are holding back Gulf Arab Islamic bond sales, even though issuers have little to do with the bad loans that triggered the crisis, a Gulf bond arranger said.

Gulf policymakers and bankers have said the region has had little exposure to subprime debt, but sales of Islamic bonds, or sukuk, have dried up as regional investors hold back and wait for better pricing, said Ahmed Abbas, chief executive of Bahrain’s Liquidity Management Centre (LMC).

“Nine out of 10 issuers can’t even spell subprime,” Abbas told the Reuters Islamic Finance Summit.

“I think investors are holding back because of the greed factor … and are saying, ‘We know global liquidity is scarce. I have liquidity. You dance to my tune. End of story,'” Abbas said of regional investors.

Islamic bonds comply with Islam’s ban on interest, and are based on physical assets from which returns are derived and paid to bondholders instead.

Spreads for more than $15 billion of Islamic bonds on the HSBC-DIFX GCC Sukuk Index have more than doubled since June to 217 basis points on January 23.

Gulf borrowers are increasingly turning to syndicated loans for fundraising and turning away from the once red-hot sukuk market because of widening spreads and the fear that a sale of the high-profile instrument could fail, Abbas said.

“The value added from publicity is no longer there. You don’t want to be seen to be paying now what you did not want to pay yesterday … Plus, you have the possibility of failure,” Abbas said.

In December the Dubai Electricity and Water Authority (Dewa) pulled the sale of conventional and Islamic bonds worth as much as $2.5 billion from the market as borrowing costs rocketed on the fall-out from subprime loans.

The firm has since sought to raise an Islamic loan worth at least $1 billion, sources familiar with deal told Reuters in January.

“If Dewa can fail, anybody can fail … For me Dewa was one of the strongest credits ever,” Abbas said.

Also depressing demand for Dewa’s dollar-denominated bond was the expectation at the time that Gulf currencies, of which all but one are pegged to the falling dollar, would be allowed to strengthen to damp soaring regional inflation.

Dubai business park Jebel Ali Free Zone sold dirham-denominated Islamic bonds worth $2.04 billion at about the same time Dewa’s dollar offering failed, on strong demand from investors eyeing future returns from a stronger dirham.

However, currency speculation is less of a factor for sukuk sales now, Abbas said.

“There is a loss of momentum on the issue, but are we back to where we were before the speculation began? No,” he said.

The LMC arranges relatively small sukuk compared with the Jebel Ali and Dewa sales — the firm arranged about $430 million of the instrument in 2007, down from an expected minimum of $500 million.

However, the market for small issues was less affected by higher pricing pressure than bonds from larger issuers, and the LMC was aiming to close three sukuk deals this quarter, he said, with a view to arranging deals worth up to $800 million in 2008.

“Large corporates are more sensitive to pricing.”

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