* First default for a major Islamic instrument in the region
* Will be watched to see if it sets precedent for defaults
By Rania El Gamal
KUWAIT, May 12 (Reuters) - Kuwait’s Islamic firm Investment Dar TIDK.KW said it had defaulted on a $100 million Islamic debt issue, the first such default for a major, public Islamic instrument in the region.
The firm made the notification through its Bahraini unit The Investment Dar Sukuk Company, which said on Tuesday that an event of default of more than 14 days had occurred in the payment of a periodic distribution amount on its sukuk maturing in 2010, according to a bourse statement.
“We are just giving notice to the lenders of Dar that there is an event of default,” an official of the Kuwaiti-based firm told Reuters. “We are saying that all payments will be made according to Dar’s restructuring plan irrespective of the maturity dates which were previously agreed upon.”
The default will be closely watched by investors keen to see how any restructuring efforts of Islamic instruments play out and whether they set precedents for future defaults.
“You’ve got to keep it in the context of the conditions we have in the market now. Global default rates are skyrocketing. Default risk is increasing across the board,” said Abdul Kadir Hussain, chief executive at Mashreq Capital, the investment unit of Dubai-based Mashreq Bank (MASB.DU).
“What will be more interesting is how the recovery is worked out, how restructuring takes place and how the process is followed to conclusion,” he said. “That will set the benchmark for how investors assess default risk.”
Dar, which holds stakes in companies such as carmaker Aston Martin and Boubyan Bank (BOUK.KW), said in December it was seeking to borrow up to $1 billion to refinance debts.
Dar said the $100 million of sukuk in default were part of the 1 billion Kuwaiti dinars ($3.45 billion) in debt under restructuring.
The firm said in March it may sell some assets to meet its obligations as a part after it has presented foreign and local banks and investors with a restructuring plan.
Sukuk are Islamic securities similar to conventional bonds, but returns are derived from underlying assets to comply with Islam’s prohibition of interest rates.
Sukuk, a product of the emerging Islamic finance industry, started to boom only a few years ago before the financial crisis grounded issuance to a halt last year, and very few sukuk have matured yet.
Rating’s agency Moody’s said in a report released last week that sukuk are being tested for the first time by originator insolvencies and proposed restructuring in the current financial and economic crisis.
It said that while in theory sukuk structures give investors ownership in assets underlying a sukuk, in practice these assets often merely serve to comply with Islamic law and investors will have no ownership rights in case of default, making the risk profile of a sukuk similar to a conventional bond. ($1=.2897 Kuwaiti Dinar) (Additional reporting by Frederik Richter; Editing by Thomas Atkins and Jon Loades-Carter)