Since the market's darkest day on February 11 the average yield on corporate GCC sukuk has fallen from 17.2% to 10.1% and the average credit spread over LIBOR has narrowed from 1,414 to 763 basis points.
Trowers & Hamlins says that although the revival in optimism is partially driven by the recent rally in the world capital markets, confidence is rising faster in the Gulf thanks to recovering oil prices and the $10bn bail-out loan granted to Dubai by the UAE Central Bank.
Neale Downes, Partner at Trower & Hamlins, comments:
"The recent sharp rise in the average price of GCC corporate sukuk has been fuelled by the growing belief that corporate sukuk default risk has been greatly reduced. Many corporate sukuk are seen as effectively having a sovereign or quasi-sovereign risk attached."
"The bail-out of Dubai has demonstrated there is a great determination to control the impact of any further economic shocks within the region. The GCC Governments don't want to see a Lehman Brothers take place in the Middle East. With Governments standing so strongly behind their economies, the perceived risk of defaults in the Gulf is now far lower, pushing down sukuk yields to much more sensible levels," Downes added.
Trowers & Hamlins says that state-linked companies have benefited directly from the Federal loan, which has enabled them to resume the payment of outstanding bills. With Governments also actively helping companies refinancing loans coming to maturity, this has helped decrease corporate default risk.
The most recent example of this is the injection of a significant but undisclosed amount of Government money into Palm Jumeirah island developer Nakheel.
Neale Downes comments, "Construction businesses, a large number of which are Government-owned, should particularly feel the pressure ease as a result of the bail-out. As property is often the chosen underlying asset used to secure Islamic bonds, improved optimism towards the property sector will hopefully have a positive knock-on effect on the sukuk market."
Trowers & Hamlins says that underpinning all of this, the stabilisation and then recovery of oil prices has boosted investor sentiment, helping improve the fundamentals of corporates across the Gulf.
Neale Downes says, "Whilst the projects sector in the Gulf has taken its fair share of knocks, activity is being sustained as so many projects are needed to continue improving the region's infrastructure."
Trowers & Hamlins says that Bahrain's $500m sovereign Islamic bond issue due at the end of May, the first major sukuk deal in the Gulf this year, could act as a catalyst for renewed interest in the sovereign as well as corporate sukuk market.
Neale Downes comments, "We believe that this first substantial deal could help kick-start the Islamic debt market, triggering a number of other new deals to follow later this year if issuers become more confident that they can attract investors."
Adds Neale Downes, "Activity is beginning to pick up and we are now advising a number of funds and investment banks on investment structures to invest in sukuk."