Interpreting Middle East Economic News and Analyzing Market Trends

Junk sukuk – the next trend in Islamic finance… and Kuwait looks to launch derivatives to pump up market

Sukuk Trading

What’s the best way to increase trading volume in stale markets?  Launch exotic new products to entice new investors.  The UAE is looking to launch high-yielding (a.k.a. junk) sukuk as it pushes to become the global hub for Islamic finance and Kuwait is eying the derivatives markets.

  

GEMS Education, a Dubai-based schools operator, has set initial pricing thoughts of an 11.75-12.00 percent profit rate for its planned debut sale of hybrid Islamic bonds, according to a document from lead arrangers.

The company, which employs about 11,000 staff and operates around 100 private schools across the Gulf region, has hired Morgan Stanley Inc, Credit Suisse and Abu Dhabi Islamic Bank (ADIB) to arrange the sale.

The sukuk sale will use a mudaraba structure – a common Islamic financing method — and will be callable after five years, the document showed. No details on the planned size of the offering was provided.

Read the full story from Reuters.

  

The buzz word here is ‘hybrid’ sukuk because it’s a perpetual sukuk, which is supposed to behave more like a stock than a bond.  This $500 million issue will have an extremely high yield (up to 12%) for the first 5 years and then drop to 5% if not called back.  So with a double-digit yield, what investor in their right mind will not call back this issue after 5 years?!  Assuming there is anything to call back at that time.

  

This high yield is clearly in junk territory.  All of the sukuk traded on Nasdaq Dubai, the region’s defacto sukuk exchange, are yielding 5% or less.  This high yield should scare any sane investor away.  The buzz word that has not been heard from the press is ‘junk sukuk.’  The GEMS sukuk is far from being a gem and launches a new brand of sukuk that has yet to be defined; junk.

  

Kuwait’s stock exchange plans to launch derivatives trading in the first half of 2014 using its new Nasdaq-backed trading system, a senior stock exchange official told Reuters.

Kuwait’s bourse, one of the oldest in the Gulf region, launched the “X-stream” trading system in May last year at a cost of around 18.3 million Kuwaiti dinars ($65 million), part of its biggest technical overhaul in nearly two decades.

The main aims of the Nasdaq OMX Group Inc. system were to launch the trading of financial instruments and to clamp down on dubious market activity.

The exchange hopes to launch derivatives trading in the first six months of next year “if things proceed as expected,” Stock Exchange Projects Manager Issam Alusaimi told Reuters in an interview.

A Kuwaiti investment firm has already expressed interest in trading options, Alusaimi said, saying that the company’s request had now been sent to the financial market watchdog. He declined to give the name of the firm.

The system will also be ready for trading futures, exchange-traded funds and Islamic bonds if similar requests are made, he said. Local and international investors will be able to use the system, he added.

The stock market suffered heavy losses during the global financial crisis but has seen a surge in activity since the start of this year, thanks to renewed optimism about government infrastructure plans that may benefit Kuwait companies.

Read the full story from Reuters.

   

Kuwait is one of the largest, oldest and most liquid exchanges in the region.  However, the article above sums it up by saying “ a surge in activity since the start of this year, thanks to renewed optimism”  This market, like all other markets around the world, is not running on fundamentals.  Optimism is driving momentum.  In order to keep optimism going, new products must be launched to find creative ways to bring back investors.

  

The UAE is going for exotic Islamic financial products and Kuwait is planning to launch Financial WMD’s.  The ending of this story has already been written.