The cost of insuring Islamic bonds has risen to a six-week high as global financial turmoil threatens a regional recovery in the sukuk market.
Uncertainty created by the market volatility combined with the traditional summer slowdown is likely to deter new sales, say analysts. "It's sentiment driven," said Nida Raza, the senior vice president of capital markets at Unicorn Investment Bank of Bahrain. "Banks are pricing yields higher as they look at bond markets as a whole and are seeing the cost of risk going up."
Islamic bonds in Dubai have dropped as investors flee lower credit-rated assets linked to concerns about an escalation of the US and European debt woes.
The difference between average yields for sukuk and the London interbank offered rate rose 0.37 per cent last week to 252 on Thursday, the largest gap since June 27, according to data cited by Bloomberg News from the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The sukuk market is falling back from a rebound after the global recession.
Yields, the cost of insuring sukuk against a default, had been dropping. Issuance reached US$16.7 billion (Dh61.3bn) in the first seven months of the year, more than double the total for the same period last year.
Abu Dhabi's First Gulf Bank (FGB) this month became the first conventional bank in the UAE to issue an Islamic paper. It received a six-times oversubscription to its maiden $650 million sukuk. FGB's bond issue followed $12.8bn of sukuk sales across the GCC in the first half of the year.
But the activity may grind to a halt. "We are likely to see few issuances in the next few months," said Parth Kikani, the assistant fund manager at Al Mal Capital. "General global risk is causing people to sell risky names and flee to safer assets."
The global uncertainty has already prompted companies in the region to put on hold plans to raise money through conventional and Islamic bond markets. Dolphin Energy, a gas production and pipeline company based in Abu Dhabi, and the mall operator Majid Al Futtaim Holding have both postponed bond issues until market conditions improve. Such delays added to a "pipeline" of potential sukuk sales likely to emerge once summer and Ramadan ended and global conditions improved, said Ms Raza.
Qatar Islamic Bank is believed to be planning to raise between $500m and $1bn via a sukuk sale.
The Yemen government has also previously signalled its intention to sell $500m of local currency Islamic bonds. But current turmoil in that country has delayed the plans.