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Old 11-26-2009, 10:58   #1
Warrior-Mentor
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Post Sharia Finance Threat: Islamic bonds

Islamic bond problems herald due-diligence era
By Cecilia Valente and Frederik Richter
Reuters
Nov 26, 2009


LONDON/MANAMA (Reuters) - Islamic bond defaults and the standstill requested for Dubai's Nakheel NAKHD.UL will transform the market as investors demand more transparency and subject new issues to forensic due diligence.

Investors in real estate developer Nakheel were stunned following the announcement on Wednesday that the company and its owner state-run Dubai World would delay by at least six months repayment on billions of dollars in debt.

Nakheel had a $3.5 billion Islamic bond, the largest ever issued, maturing on December 14, an obligation the market widely expected to be honored.

"If there are lessons to be learned here, it is that due diligence is all important. Compliance to sharia in its structuring does not ensure the success of a sukuk or of any product or business," said Yusuf Talal DeLorenzo, chief sharia officer at fund management company Shariah Capital.

The sukuk market was already jittery before the news from Dubai. Earlier this month prominent Saudi business group Saad SAADG.UL said it would miss the payment of the second bi-annual coupon on its $650 million Golden Belt Sukuk Belt 1 Sukuk domiciled in Bahrain.

In May Kuwait's Investment Dar (TIDK.KW) said it defaulted on a $100 million sukuk.

In its simplest form sukuk are certificates proving ownership of an asset but unlike bond holders, sukuk investors do not receive interest but rather returns generated by the underlying assets pooled under special purpose vehicles (SPV).

The events have shaken the reputation of sukuk as safer and more transparent than their conventional counterparts -- just as the market was recovering from a slump in 2008, with issuance up 40 percent in the first ten months of the year.

They also show that sukuk do not necessarily grant ownership of the underlying assets, which would in theory make investors safe in case of default.

"Clarity on the structure is essential. The Islamic finance industry must do all it can to avoid accusations of mis-selling products," said a senior industry figure, who spoke on condition on anonymity.

The nature of the sukuk also plays a role in where Islamic debt is ranked in debt restructuring processes such as the ongoing ones at Saad and Investment Dar.

"It will be interesting to see whether the recovery value will be higher than at the senior debt," Mohieddine Kronfol, managing director at Dubai asset manager Algebra Capital, said of the Saad sukuk.

DOUBTS

Even when investors fully understand the structure of the sukuk, it is not certain their ownership rights will be reinforced, said an Islamic finance expert who declined to be named.

"The reality is that Middle Eastern property law is so weak that even with asset-backed, people have little confidence in the success of that claim," the expert said, adding most investors did know the risks involved.

"All the rating agencies have never rated Middle Eastern sukuk in reference to the assets, they only ever rated them in reference to the credit rating of the sponsoring entity. They were rated as unsecured liability," he said.

A dramatic sell-off, although possible, looks improbable, according to Indraj Mangat, a partner at law firm Eversheds' Islamic Finance Group.

"The defaults in the Gulf sukuk markets are more a reflection of the broader economic difficulties in the Gulf than an indictment of sukuk per se. It is possible that investors may judge sukuk on the defaults but that is like throwing the baby out with the bath water," he said.

Investors however will become more discerning.

"Lending in the Gulf has often been based on the perceived value of the family name of the borrower or its backers. The current announcement sees that position being eroded, " said Amjad Hussain, head of banking and Islamic finance, Middle East at law firm Eversheds.

"The defaults in the Gulf will now act as a catalyst for lenders to encourage them to adopt a more impartial and diligence-led process. This is good for the long-term development of the Gulf economies including on corporate governance-type issues," Mangat said.

(Editing by Sitaraman Shankar)

SOURCE:
http://www.reuters.com/article/ousiv...5AP33L20091126
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Old 11-26-2009, 12:04   #2
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Dubai Debt Delay Rattles Confidence in Gulf Borrowers (Update3)

The game is afoot. In other developments...whether related or not, I am not sure...the dollar is down and rumor control suggests that the EU is about to snarl at Greece about their monetary policy.

I think I shall give thanks I am NOT the POTUS!

LINK


By Laura Cochrane and Tal Barak Harif

Nov. 26 (Bloomberg) -- Dubai shook investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001.

The cost of protecting government notes from Abu Dhabi to Bahrain rose, extending the steepest increase since February as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors. Its debt includes $3.52 billion of bonds due Dec. 14 from property unit Nakheel PJSC. Dubai credit-default swaps climbed 90 basis points to 530 after yesterday increasing the most since they began trading in January, CMA Datavision prices showed.

“There is nothing investors dislike more than this kind of event,” said Norval Loftus, the head of convertible bonds and Islamic debt at Matrix Group Ltd. in London, which manages $2.5 billion of assets including Dubai credits. “The worst-case scenario will of course be involuntary restructuring on the Nakheel security that brings into question the entire nature of the sovereign support for various borrowers in the region.

Dubai World’s assets range from stakes in Las Vegas casino company MGM Mirage to London-traded bank Standard Chartered Plc and luxury retailer Barneys New York through asset-management firm Istithmar PJSC. The Dubai government’s attempt to reschedule debt triggered declines in stocks worldwide that had been rebounding from the worst financial crisis since the Great Depression.

Side comment by NMAP: Commercial Real Estate (CRE) is, potentially, the next shoe to drop in the ongoing U.S. banking crisis. This doesn't help matters, particularly in hard-hit Las Vegas.

Worldwide Slump

The MSCI Emerging Markets Index of stocks headed for the biggest decline in four weeks, falling 2 percent, led by Russia and China. Europe’s Dow Jones Stoxx 600 Index lost 2.5 percent, the biggest decline since July 2, at 2:46 p.m. in London. South Africa’s rand and the Turkish lira weakened 2.1 percent against the dollar. Hungary’s forint lost 1.7 percent per euro. Credit- default swaps on Russia increased to 205 basis points from 192.

The MSCI World Index of 23 developed markets has risen 26 percent this year after banks worldwide recorded more than $1.7 trillion in writedowns and losses and governments committed about $12 trillion to shore up economies.

“The announcement was a shock,” said Beat Siegenthaler, chief emerging-market strategist at TD Securities Ltd. in London. “It is strongly affecting European markets.”

Dubai, ruled by Sheikh Mohammed Bin Rashid Al Maktoum, borrowed $80 billion in a four-year construction boom to transform the economy into a regional tourism and financial hub. The emirate suffered the world’s steepest property slump in the global recession with home prices dropping 50 percent from their 2008 peak, according to Deutsche Bank AG.

Downgrades

Moody’s Investors Service and Standard & Poor’s cut the ratings on Dubai state companies yesterday, saying they may consider Dubai World’s plan to delay debt payments a default.

Gulf region default swaps jumped, with contracts linked to Bahrain adding 29 basis points today to 223.5, the biggest increase since Feb. 18. Contracts linked to Abu Dhabi added the most since February yesterday, climbing 36 basis points to 136.5 and were another 23 basis points higher at 159.5 today, according to London-based CMA. Qatar default swaps rose 13 basis points to 117, adding to yesterday’s 11 basis-point increase.

Dubai is the most indicative of the huge global liquidity boom and now in the aftermath there will be further defaults to come in emerging markets and globally,” said Nick Chamie, head of emerging-market research at Toronto-based RBC Capital Markets.

Saudi Debts

Saudi Arabia default swaps climbed the most since February, adding 18 basis points to 108. The British Bankers’ Association asked the U.K. government to intervene with Saudi authorities over debts of at least $20 billion owed to as many as 100 banks by Saad Group and Ahmad Hamad Algosaibi & Brothers Co., two family holding companies based in the oil city of Al-Khobar, according to a letter dated Nov. 20.

Side comment by NMAP: Lower oil prices are great - even if the cause is wide-spread economic recession. Except oil exporters, including KSA, depend on the revenue. I was reminded recently that increasing affluence tends to reduce radicalism. The corollary is that sudden loss of affluence might increase radical behavior.

Default swaps on Dubai World unit DP World Ltd., the Middle East’s biggest port operator, jumped by a record 181 basis points to 540.5 yesterday and were priced another 72 basis points higher today at 612, according to CMA data.

Dubai World had $59.3 billion in liabilities and $99.6 billion in total assets at the end of 2008, subsidiary Nakheel Development Ltd. said in an August statement. Dubai owes $4.3 billion next month and $4.9 billion in the first quarter of 2010 through government and corporate debt, Deutsche Bank AG data show.

Side (snide?) comment by NMAP: Those assets might not be as valuable as advertised. For example, a Pontiac stadium that cost $55 million to build was recently sold for $583 thousand. About a cent on the dollar. LINK .

“DP World and its debt are not included in the restructuring process for Dubai World,” the government said in a statement to Nasdaq Dubai today.

‘Brink of Failure’

The price of Nakheel’s bonds fell to 70.5 cents on the dollar from 84 yesterday and 110.5 a week ago, according to Citigroup Inc. prices on Bloomberg.

“Nakheel is now standing on the brink of failure given the astonishing amount of cash Dubai would have to inject on it in order to see the enterprise survive,” said Luis Costa, emerging-market debt strategist at Commerzbank AG in London. “Events like this are a perfect storm.”

Dubai credit-default swaps now rank as the fifth most expensive worldwide, exceeding Iceland’s and Latvia’s.

The contracts, which increase as perceptions of credit quality deteriorate, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point is 0.01 percentage point and is equivalent to $1,000 a year on a contract protecting $10 million of debt.

Abu Dhabi Aid

UBS AG, Switzerland’s largest bank, said it expects the U.A.E. will prevent a default by Nakheel. Owners of bonds sold by Nakheel scheduled a conference call today, said an investor and a trader who received the details.

Dubai is one of seven sheikhdoms in the U.A.E. that includes Abu Dhabi, which holds 8 percent of the world’s oil reserves and bought $5 billion of bonds sold by Dubai yesterday through state-controlled banks.

Sheikh Mohammed turned to Abu Dhabi’s central bank on Feb. 23 to raise $10 billion by selling debt. The emirate’s credit default swaps dropped 178 basis points that day, after trading for a record 976 basis points.

Unlike Argentina, which stopped payments on $95 billion of debt eight years ago after yields on benchmark bonds more than doubled in four months to more than 40 percent, Dubai’s announcement yesterday “was a surprise,” said Alia Moubayed, a London-based economist at Barclays Plc.

Standstill Agreement

The government raised $1.93 billion last month in its first sale of Islamic bonds, attracting more than $6.3 billion of orders. The dollar-denominated securities due 2014, which are governed by Shariah laws barring investors from profiting from the exchange of money, dropped to 5.5 percent today to 92 cents, lifting the yield to 8.4 percent from 6.2 percent on Nov. 24, according to ING Groep NV prices on Bloomberg.

Gulf International Bank BSC, a Bahrain-based lender owned by the governments of six Gulf Arab states, postponed a planned sale of bonds in a $4 billion debt program, citing the “unexpected announcement” from Dubai, according to an e-mailed statement today.

Dubai World will ask creditors for a “standstill” agreement as it negotiates to extend maturities, including $3.52 billion of Islamic bonds due Dec. 14 from Nakheel, Dubai’s Department of Finance said in an e-mailed statement yesterday.

‘Brink of Failure’

(Cont'd on next post)
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Old 11-26-2009, 12:05   #3
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(Cont'd from preceeding post)

Dubai World’s more than 70 creditors face the prospect of writedowns on as much as $60 billion of debt if they haven’t unloaded their holdings and the state-owned company fails to win additional support from Abu Dhabi.

The biggest creditors are Abu Dhabi Commercial Bank and Emirate NBD PJSC. Other lenders include Credit Suisse Group AG, HSBC Holdings Plc, Barclays, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, according to a person familiar with the situation. Barclays slumped as much as 6.9 percent, the biggest intraday loss in a month, while RBS sank as much as 8.3 percent. Lloyds and Credit Suisse dropped more than 3 percent.

“Our exposure is immaterial,” said Credit Suisse spokesman Marc Dosch. HSBC, Lloyds and RBS declined to comment when contacted by Bloomberg. Spokespeople at Barclays were not immediately available to comment.

Snide comment by NMAP: Methinks Mr. Dosch is whistling past the graveyard.

Emaar Properties PJSC, the U.A.E.’s biggest developer, was cut by four levels by Moody’s to Ba2, two steps below investment grade. Jebel Ali Free Zone, an operator of business parks, and DIFC Investments were also lowered to speculative-grade by Moody’s yesterday. DP World and Dubai Electricity & Water Authority were downgraded two levels to Baa2, the second rank above junk. Moody’s and S&P said they may cut ratings further.

The debt “restructuring may be considered a default under our default criteria,” S&P said in a statement.

‘Shut Up’

Borrowing from Abu Dhabi state banks accounted for half the $10 billion Dubai ruler Sheikh Mohammed said he planned to raise by yearend. He said Nov. 9 the program will be “well received,” and those who doubt the unity of Dubai and Abu Dhabi should “shut up.”

Snide comment by NMAP: Spoken like someone who is backed into a monetary corner and doesn't like it one bit..

Sheikh Mohammed removed the chairman of Dubai World from the board of Dubai’s main holding company, the Investment Corporation of Dubai, last week.

Contracts on Abu Dhabi National Energy Co., the state- controlled energy producer known as Taqa, jumped 70 basis points to 250, the highest since August. Swaps linked to Mubadala Development Co., a government-backed investor that announced an $8 billion joint venture with General Electric Co. last year, rose 111 basis points to 247, according to CMA. Mashreqbank PSC, the United Arab Emirates-based lender owned by billionaire Abdul Aziz al-Ghurair, jumped by a record 254 basis points to 639.

It’s very important to resolve this in a way that will minimize contagion across the region,” Matrix Group’s Loftus said.
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Old 11-26-2009, 13:49   #4
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Not a "threat," WM, just a debt default. By Arabs. Nothing to see here, move along . . .
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Old 11-26-2009, 15:40   #5
Warrior-Mentor
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That's what I get for listening to Sharia Finance Experts like Patrick Sookhdeo
from the Institute for the Study of Islam and Christianity, and author of
"Understanding Sharia Finance: The Muslim Challenge to Western Economics."

From Chapter 6. titled "Sharia Finance as Jihad"

"Jiahd bi'l Mal ("wealth") and bi' al-Nafs ("self-sacrifice"): the struggle against the infidel and polytheists. In the majority of Qur'anic verses about jihad, the use of wealth in jihad comes first, before actual fighting and self-sacrifice. It is worth noting that self-sacrifice gains the highest reward."

According to Qur'an and sunna, Allah commands Muslims to devote their wealth and their lives to jihad. Shari'a finance is a modern reconstruction and extension of the directives to economic jihad contained in the Quran and hadith.

Shari'a-compliant finance [also known as "SCF"] is defined by it's theological opposition to all non-islamic forms of conventional banking, identified primarily by interest and risk.

The financial products and operations of sharia finance are based upon mimicking or altering of these conventional financial norms, the results of which are deception and confusion."

Sookhdeo, Patrick. Understanding Sharia Finance, pages 31-32.

...and yes, I got the "move along" tongue in cheek. Thanks Buddy.
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