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Banking

Islamic finance: Sukuk market on trial as Islamic bonds default

Debt restructurings are untested process; Demand for new sovereign sukuk still strong

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 are taking place, especially in Dubai. Property developer Nakheel, for example, is trying to restructure its debt, including a $3.5 billion sukuk that matures in December.

Different concept
Restructuring of Middle Eastern bonds is a relatively untested process even in the conventional market. In the Islamic market, however, things are even more complicated, as western resolutions are less readily transferable.

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