Islamic Bonds Issuance Defies Gloom

Quoted from the Financial Times By David Oakley

Islamic corporate bond issuance in the Gulf has soared in the past year in spite of the credit crisis and deteriorating global economic outlook.

Corporate bonds issued in the Gulf rose to $17bn at the end of June, compared with $14.5bn at the end of June 2007 – a 17 per cent increase, according to Trowers & Hamlins, the international law firm.

Significantly, 60 per cent of the bonds were bought by western institutions as European and US investors sought more exposure to the Gulf, which continues to grow strongly in defiance of the global slowdown.

Bankers say Islamic bond, or sukuk, issuance is also rising sharply in Asia, although the Gulf is increasingly considered the ideal place to invest because of the soaring oil price, which has boosted wealth in the Middle East.

The Gulf economies, which comprise Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and the United Arab Emirates, have more than doubled in size since 2002 as the oil price has quadrupled from $30 a barrel to more than $130.

Neale Downes, partner at Trowers & Hamlins, said: “Appetite for Islamic debt has been remarkably resilient to the credit crunch and shows just how low-risk investing in the Gulf corporates is now seen by western institutions.”

He added: “A few banks in the region have taken subprime writedowns, but there is so much liquidity in the Gulf with the high oil price, that recapitalising these institutions has not been a major challenge. Inevitably, a lot of this oil money is being used to buy Islamic debt.”

The issuer profile of sukuk, which are structured to pay profits rather than interest because of religious laws, is also changing as the economies become more sophisticated, with financial services companies contributing more to economic growth than in the past.

The number of financial services companies issuing Islamic bonds has risen sharply. They make up 25 per cent of the companies raising Islamic bonds in the region. Real estate companies, which have traditionally raised the most money, made up 37.5 per cent, a sharp fall from the previous year of 60 per cent.

The overall sukuk market, which includes government bonds, is valued at $80bn, making it one of the fastest growing sectors in the world as it has grown from nothing at the start of the decade. The first sukuk bond was issued in 2002 by the government of Malaysia.

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