Islamic finance: Sukuk market on trial as Islamic bonds default

The Islamic finance industry is undergoing a big test as defaults and restructurings appear in the sukuk market for the first time.

Last month there was a default on a $650 million Islamic bond launched in 2007 by an offshore vehicle linked to Maan Al Sanea’s troubled Saudi group, Saad. This came hot on the heels of the first non-payment of an Islamic bond in the Middle East: the $100 million sukuk issued by Kuwaiti firm The Investment Dar in 2005.

These defaults follow last autumn’s bankruptcy of Texas-based East Cameron Gas Company, which issued a $167 million Islamic securitization in 2006. A court in Louisiana is deciding what rights, if any, the noteholders have. There is uncertainty as to whether the issuer of the notes is bankruptcy remote and whether a true sale of the assets took place.

In the Middle East, other sukuk restructurings...