Confidence that Dubai's biggest issuer of Sharia-compliant bonds can honour its debts is likely to push the sector's growth

Islamic bonds are poised for record gains amid confidence that Nakheel , the Dubai market's biggest issuer, will avoid default, according to the Bloomberg news wire.

"Nakheel is the flagship," said Yannick Lopez, who helps oversee OFI Asset Management's $30 billion in assets. "A default by Nakheel could have wider implica-tions" on the Islamic bond market, he said.

"Our view is that the prob-ability of default on this name is quite low."

Almost non-existent a dec-ade ago, the Islamic bond market has grown to $130 billion, according to Moody's Investors Service.

prices are rebounding after three defaults in the past year as investors expect Dubai's government to prevent state-owned developer Nakheel from failing to make payments on its obligations.

The company's bonds due on December 14 rose to a record 108 cents on the dollar this month, up from 93.5 cents on September 2 and 70 per cent higher than a Fepuary low.

Nakheel , a unit of govern-ment-controlled Dubai World, owes more than $5 billion by 2011 in Islamic bonds and is among the biggest losers in a real-estate crash that cut home prices in half.

The company is a 'litmus test' for the debt of other emirate-owned enterprises, Moody's said in June.

"The UAE authorities are acutely aware of the amount of profile the Nakheel 2009 sukuk instrument has in the international capital mar-kets," said Chavan Bhogaita, head of credit research at National Bank of Abu Dhabi, the UAE's second-largest lender by assets.

"In our opinion, they fully intend to repay this bond."

Sukuk have returned 27 per cent this year, an HSBC index shows.

Last year, the market fell four times as much as investment-grade corporate debt that doesn't comply with religious edicts against interest payments as oil prices tumbled and credit markets froze.

The bonds are climbing almost twice as fast as global companies' non-Islamic debt and heading for the best annual gain since the benchmark HSBC/Nasdaq Dubai Sukuk Index's introduction in 2005.

Sales of international Isla-mic debt will double next year to $14 billion as firms such as General Electric plan debut issues, HSBC said.

Created in the 1970s after almost a 20-fold jump in oil prices over ten years, the Sharia finance industry caters to the world's 1.57 billion Muslims.

Investors fled the Islamic-debt market last year. Sales of international and domestic sukuk plunged almost 55 per cent to $14 billion as oil and real estate prices slumped and eroded Middle Eastern wealth, Bloomberg data show.

Some of the biggest Islamic debt losses were on Dubai-based companies' bonds. Investors sold out on con-cern the government would struggle to repay $71.3 bill-ion in debt after the credit crisis ended its four-year real-estate boom and forced the UAE to work on a bail-out of the emirate's two biggest mortgage lenders.

"There are only three to four defaults in the Islamic market, not 3,000," said Sheikh Nizam Yaquby, a board member of the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institu-tions, in an interview. "Standards are in place" for defaulted securities, said Yaquby, who serves on the boards of around 40 firms, including US-based Citi-group, HSBC of London and paris-based BNp paribas.

International sukuk sales will total at least $7 billion in 2009 and $14 billion in 2010, up from $5 billion in 2008, said Mohammed Dawood, a director of debt capital markets at HSBC, this year's second-biggest underwriter of such bonds.

"The sukuk market is maturing," said Yavar Moini, executive director of global capital markets at Morgan Stanley in Dubai. "Investors aren't shying away."

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