Bahrain’s Islamic Bonds Bounce Back As Leaders Crush Political Unrest
Singapore/Dubai. Bahrain’s decision to end a three-month state of emergency is restoring confidence in the island nation’s Islamic bonds.
While protests toppled leaders in Egypt and Tunisia and fighting rages in Libya and Syria, Bahrain has quelled violent street protests. The yield on Bahrain’s 6.247 percent sukuk maturing June 2014 dropped 115 basis points since March 31 to 2.81 percent, approaching a four-month low reached last week.
The notes returned 4 percent this quarter, compared with 3.2 percent for sukuk in Dubai, 2.5 percent for Malaysia and 1.7 percent in Indonesia.
The rally in Bahrain’s bonds may help revive issuance from the Persian Gulf after Albaraka Banking Group, the kingdom’s biggest publicly traded lender, delayed its plan to sell sukuk until September because of the political turmoil. Sales of Shariah-compliant securities from the six-member Gulf Cooperation Council dropped 20 percent to $1.9 billion in 2011 from the year-earlier period, data compiled by Bloomberg show.
“Now that the fear of political unrest is starting to move into the background, people are looking to buy Bahrain’s sukuk again,” said Dubai-based Abdul Kadir Hussain, who helps oversee $2 billion in fixed-income assets as chief executive officer at Mashreq Capital DIFC. “The fact the sukuk is investment grade allows some people to buy it, while Dubai still isn’t rated.”
Yields on Bahrain sukuk climbed to 4.45 percent on March 15, the highest level in a year, as King Hamad bin Isa Al Khalifa, a Sunni Muslim, imposed a state of emergency to quell one month of unrest between members of the Shiite majority and the Sunni minority. The Bahrain Human Rights Society said on its Web site on April 13 that at least 31 people were killed during the protests.
The king has announced plans to start a national dialogue from July 1. Parliamentary chairman Khalifa bin Ahmed al-Dhahrani will lead the discussions, Bahrain News Agency reported on June 11, citing a royal order.
Standard & Poor’s cut Bahrain’s credit rating for a second time this year on March 18 to BBB, the second-lowest investment grade, after reducing it to A- from A on Feb. 21. Moody’s Investors Service lowered its assessment twice this year, taking the ranking to Baa1, three levels above junk.
Central bank governor Rasheed al-Maraj said the downgrades were “uncalled for,” pointing out that economic growth will pick up in the second half of the year following the approval of a two-year budget.
Global sales of sukuk, which pay asset returns to comply with Islam’s ban on interest, rose 44 percent this year to $9.1 billion from a year earlier, according to data compiled by Bloomberg.
The extra yield investors demand to hold the Bahrain sukuk over Malaysia’s 3.928 percent dollar note shrank this quarter. The difference narrowed to 41 basis points on Friday from 110 on March 31, according to data compiled by Bloomberg. That compares with the gap between Malaysia’s security and the Dubai Department of Finance’s 6.396 percent debt due in November 2014, which was 251, down 272 at the end of March, Bloomberg data show.
Yields on Bahrain’s sukuk and the cost to protect the country’s debt from default are returning to pre-crisis levels. The rate on the Islamic bonds was 2.4 percent on Jan. 19, almost a month before the demonstrations started on Feb. 14.
“Investors are buying Bahrain’s sukuk on the back of improved sentiment following the gradual return to relative stability,” said Malek Khodr Temsah, assistant vice president of treasury and investment at Albaraka Banking in Manama.
Still, Bahrain’s low sukuk yields and concern that political unrest isn’t over make the credit less attractive, said Esther Teo of Kuala Lumpur-based HwangDBS Investment Management.
“We bought the Bahrain sukuk in March when it was attractive,” said Teo, who helps oversee about $3 billion of Islamic and non-Islamic funds. “We have sold out already. The rate is quite low at the moment, so I don’t think I’ll buy now.”