* Issuers seek to benefit from falling yields, sentiment
* Strong pipeline to be met with healthy demand for sukuk
By Shaheen Pasha and Rachna Uppal
DUBAI, May 26 A recent spate of Islamic bond issues in the Gulf region is setting up the fledging sector for a strong second half of 2011, as borrowers look to benefit from attractive pricing and improving investor sentiment.
The flurry of activity, including two Gulf sukuk issues in the past week -- by Islamic Development Bank and Sharjah Islamic Bank SIB.AD -- and several more in the pipeline, were seen as signs the sukuk market may be embarking on a recovery.
"The recent sukuk issues could be the beginning of what may be a resurgence of the sukuk market in this region," said Chavan Bhogaita, head of the markets strategy department at National Bank of Abu Dhabi.
"At the moment, because there is a lot of demand chasing limited paper, issuers can take advantage of narrower spreads. If sentiment continues to improve and it leads to stabilisation in the market, there should be more issuance in the sukuk format going forward."
This year was expected to signal a recovery for the Islamic bond market after a liquidity drought in 2010. But political upheaval in the broader region raised concerns the industry could have another slow year.
A lack of globally applied standards and regulations within the industry, as well some high-profile sukuk defaults, also put investors off raising fresh money.
But GCC sukuk yields have narrowed significantly in recent weeks, a sign of returning confidence and demand for regional Islamic paper.
On average, GCC dollar sukuk were yielding 4.55 percent on May 26 compared with about 6 percent at the beginning of March, according to the HSBC-Nasdaq Dubai GCC Sukuk index. By comparison, the average yield on GCC Conventional Bond index on May 25 was 4.95 percent.
Supranational Islamic Development Bank (IDB) raised $750 million from a sukuk sale earlier this month, yielding 2.35 percent, and SIB raised $400 million at 4.75 percent.
HSBC Middle East, Bahrain's Al Baraka Bank BARKA.BH and Qatar Islamic Bank QISB.QA are all eyeing sukuk sales. [ID:nLDE74H0EO] [ID:nLDE74E0DY] [ID:nLDE74N02C]
"2010 was a very quiet year for issuance and there is a lot of pent-up demand for sukuk in the market," said Mahin Dissanayake, director at Fitch Ratings. "Investors are seeing a good opportunity now and the timing is right."
Market watchers said the rush of activity shows investors are eyeing opportunities to invest in the Gulf in the midst of political uncertainty in the Middle East and the eurozone debt crisis.
"It was great that IDB came to the market successfully as it provides impetus to the sukuk market in a period of low issuance," said Rizwan Kanji, debt capital markets attorney at King & Spalding.
"Sharjah Islamic Bank may have provided a welcome alternative to the investor community noting the difference in yield."
But Dissanayake said a potential barrage of issuance in the second half could still hamper chances of success.
"There is a lot of demand, but the concern is if a lot of entities issue sukuk, they may not prove to be as successful." (Additional reporting by Asma Al Sharif in Riyadh; Editing by David Holmes)