Qatar's sale of a US$4 billion (Dh14.69bn) sukuk has made this year the Arabian Gulf's best ever for sales of Islamic bonds - with five and a half months still to go until the end of the year.
Investment banks have funnelled cheap credit towards the Gulf in an effort to make up for declining fee income and maintain relationships with big corporate clients.
Gulf borrowers have raised $17.4bn this year, led by sovereign sukuk sales from Saudi Arabia, Qatar and Dubai, according to Bloomberg data.
That figure eclipses the $16.1bn raised in 2007, the next-highest year on record. In both years, a total of 23 deals took place.
Qatar's sukuk sale followed high levels of demand for other highly rated Gulf sovereign bonds and generated a huge order book, reported by Reuters to be in excess of $24bn.
"Globally, there's a scarcity of interesting assets to invest in," said Neil Miller, the global head of Islamic finance at KPMG. "Most of the demand is from regional investors, who are supporting their own jurisdiction … Investors are still bullish about the prospects for the region."
But the bigger numbers of sukuk sales also reflected a lack of access to other sources of finance, Mr Miller added.
Gulf borrowers raised $7.3bn in funding through Islamic bonds last year, the data shows, with deal volumes sapped as the effects of the Arab Spring reduced investor appetite for Middle Eastern assets and cash-strapped European banks proved hard to tap for funding.
Banks broke the impasse by raising funding for Islamic bond sales from large institutional investors in the Gulf and South East Asia that have been starved of Sharia-compliant assets in which to invest.
But the high levels of debt being issued have thrown a lifeline to investment bankers in Dubai who have seen mergers and acquisitions dwindle and equity markets all but dry up.
Syndicated loans to companies - formerly the most common method through which European banks funded projects in the region - have fallen to their lowest levels in a decade as a result of strained bank balance sheets.
Meanwhile, initial public offerings have struggled to get off the ground in the UAE as a result of poor liquidity on local markets.
At the same time, banks have competed hard for deals by undercutting each other on fees, leading them to increase the volume of sukuk sales to compromise.
"It's pretty competitive. There's not tons of deals around in the conventional markets, and a lot of the banks want to be in on the transactions. Their relationships have to be managed," said Debashis Dey, a partner at the law firm Clifford Chance. "They're going to try to stay in the market while the market's hot, which may mean undercutting each other on fees."
Investment banks may be using large sales from Gulf governments as loss leaders to ensure they can retain other business, analysts said.
Investment banks' fee income from deals across the Middle East during the first half of the year rose 5 per cent to $234.8 million, compared with the corresponding period a year earlier, according to data from Thomson Reuters.
But following the surge in debt sales, fees for bond and sukuk deals during the first half of this year more than doubled to $54.9m, compared with $25.1m during the same period last year.
The value of bonds and sukuk outstanding issued by borrowers in the UAE is at the highest level in the country's history, according to the Bank for International Settlements.
(The National / 13 July 2012)
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Alfalah Consulting - Kuala Lumpur:www.alfalahconsulting.com
Islamic Investment Malaysia:www.islamic-invest-malaysia.com
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