Interpreting Middle East Economic News and Analyzing Market Trends

Category: Islamic Finance

Cheap debt leads to a rush to issue Sukuk

Record low interest rates around the world has fueled a rush to issue more and more debt.  Emerging markets have been key beneficiaries of this cheap debt (see older post on Sukuk and Emerging Market Debt).  The sukuk market has also been one of the key beneficiaries of cheap debt.  Here’s a recent article from The National:

Dubai Electricity and Water Authority (Dewa) will probably pay almost 50 per cent less to sell debt than it did almost three years ago after borrowing costs plunged four times more than global peers amid a pick up in power demand.

The state-owned company hired six banks to raise as much as US$1 billion from the sale of Islamic bonds, a banker familiar with the deal said January 31. Dewa, which has investment-grade ratings at Moody’s Investors Service and Standard & Poor’s, will probably pay about 4 per cent on 10-year bonds, according to Commerzbank and Mashreq Capital DIFC, which are not involved in the sale. It sold similar-maturity notes in October 2010 at 7.375 per cent.

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Emerging Market Debt Issuance Hits Record and Spills Over into Sukuk Market as Investors Worldwide Hunt for Yield

The funny thing about unintended consequences is that they pop up regardless of your original intentions, good or bad. I’m sure central bankers’ in the US and EU had good intentions for keeping interest rates near zero for so long, but their efforts to stimulate their economies and help them recover from a bubble collapse have led to the creation of another bubble. Record low yields in developed markets are pushing investors to search for higher yields.

 

For 2012, issuance of emerging-market bonds denominated in the U.S. dollar soared to about $375 billion, marking a record high since data provider Dealogic began tracking the data in 1995. Issuance far outpaced the previous year, when emerging-market issuers sold $235.5 billion in new debt.

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