Downgrade of credit rankings by ratings agencies makes borrowing costlier
(DUBAI) Syariah-compliant loans slumped to a five- year low in Europe, the Middle East and Africa in the first half on credit-ratings downgrades and falling property prices.
Islamic syndicated loans declined 40 per cent to US$2.2 billion, compared with a 5 per cent drop in total lending to US$304 billion, according to data compiled by Bloomberg. Real estate prices have dropped 50 per cent in the United Arab Emirates from their peak in August 2008, according to estimates from Colliers International.
'Banks have plenty of liquidity but they have been very selective when it comes to where they would like to deploy it,' Faisal Hijazi, business development manager of rating services and Islamic finance in Dubai at Moody's Investors Service, said in a July 1 interview in Kuala Lumpur. 'Real estate and investment companies seem to be the most seriously challenged when it comes to refinancing.'
Middle East property developers have been forced to renegotiate loans and bonds after they struggled to meet their obligations, prompting ratings companies to downgrade credit rankings and making borrowing more expensive. The last time banks made fewer Islamic loans was in 2005, when the total was US$75 million.
The UAE's state-owned Dubai World, Saudi Arabia-based Saad Group and Investment Dar Co in Kuwait announced plans in the past year to restructure debt. Dubai Holding Commercial Operations Group, a real estate and hospitality company, had its rating cut to B2 on June 30 by Moody's, five levels below investment grade.
Islamic finance transactions are based on the exchange of assets rather than interest to comply with the syariah principles.
Created in the 1970s, the industry's assets may quadruple to US$2.8 trillion by 2015 from about US$700 billion in 2005, according to the Kuala Lumpur-based Islamic Financial Services Board, a standards-setting body.
Dubai Department of Finance's sukuk, or Islamic bonds, have dropped since the debt was sold in October. The 6.396 per cent note maturing in November 2014 yielded 7.82 per cent, 145 basis points more than 6.37 per cent at the time of issue, according to Bloomberg bond trader composite prices. The rate reached a record high of 10.29 per cent on Feb 15. The securities' spread over similar- maturity US Treasuries narrowed 187 to 624 in the same period.
The HSBC/Nasdaq Dubai US Dollar Sukuk Index, made up of sukuk from Indonesia to Saudi Arabia, gained 0.8 per cent in the three months ended June 30. The average yield on corporate and government sukuk dropped seven basis points, or 0.07 percentage point, to 6.29 per cent last quarter, according to the HSBC/Nasdaq Dollar Sukuk Index.
The yield on Malaysia's 3.928 per cent Islamic notes due June 2015 fell one basis point last week to 3.57 per cent, according to prices from Royal Bank of Scotland Group.
Dubai companies may have to restructure loans due over the next 12 to 18 months, Moody's said in a report on June 14. Arab companies in the Persian Gulf region have US$28 billion of debt maturing in 2012, Moody's said.
The loan of Qatari Diar Real Estate Development Co, a unit of the Gulf state's sovereign wealth fund, was one of four Islamic loans in Europe, Middle East and Africa so far this year, the data show. It borrowed US$300 million in April from banks led by HSBC Holdings plc, Europe's biggest lender by market value, Bloomberg data show.
In Asia, the Malaysian government's plan to spend RM230 billion (S$99.3 billion) on development projects from 2011 to 2015 may boost demand for financing, according to rating company RAM Holdings Bhd. Bank loans in Malaysia more than doubled to US$4.1 billion in the first half, the highest in two years, after the country climbed out of its first recession in a decade last year.
Malaysia's economy is forecast by Prime Minister Najib Razak to expand as much as 6 per cent this year after shrinking 1.7 per cent in 2009.
Maybank Islamic Bhd, a unit of Malaysia's largest lender Malayan Banking Bhd, expects to increase Islamic loans by 20 per cent to 30 per cent for the financial year ending June 2011, chief executive officer Ibrahim Hassan said in a message to Bloomberg on July 1.
Dubai World, whose unit Nakheel is building palm-shaped islands off Dubai's coast, reached an agreement with its main creditor group in May to restructure US$23.5 billion of liabilities.
Saad Trading, Contracting and Financial Services Co, a unit of Saad Group owned by billionaire Maan al-Sanea and his family, defaulted on a US$650 million sukuk in November. Investment Dar, the Kuwait- based owner of half of Aston Martin Lagonda Ltd, was unable to meet obligations on its outstanding US$30 million debt in April last year, according to data compiled by Bloomberg.
The company and its creditors agreed to most commercial aspects of restructuring liabilities, the creditors committee said on June 14. It had 1.03 billion dinars (S$4.9 billion) of debt outstanding at the end of September 2008.
'The quality of the creditors has deteriorated,' Mr Hijazi of Moody's said during an Islamic capital market forum in Kuala Lumpur. 'So the uncertainty is still pretty much there.' - Bloomberg
Source: Business Times, 6 Jul 2010