Oil Helps Islamic Bonds Dodge Credit Crunch: FT
Despite the credit crisis and deteriorating economic outlook, Islamic corporate bond issuance in the Gulf soared over the past year, the Financial Times reported Tuesday.
Corporate bonds issued in the Gulf rose to $17 billion at the end of June, increasing 17 percent from $14.5 billion for the same period the previous year, the FT said, citing research from law firm Trowers & Hamlins.
Sixty percent of the bonds were bought by Western institutions as European and U.S. investors sought to increase exposure to the Gulf, according to the FT.
Islamic bond issuance, or sukuk, is also rising sharply in Asia, the newspaper reported.
The Gulf continues to defy the global economic slowdown, with its economy more than doubling in size since 2002 as the oil price continues to soar, making the region an attractive investment.
"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," Neale Downes, partner at Trowers & Hamlins told the FT.
"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 recapitalizing these institutions has not been a major challenge," Downes said. "Inevitably, a lot of oil money is being used to buy Islamic debt."
According to the Financial Times, 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, the FT said.
The overall sukuk market, which includes government bonds, is valued at $80 billion, making it one of the fastest growing sectors in the world as it has grown from nothing at the start of the decade, according to the report.