The value of corporate conventional bonds issued in the GCC has raced ahead of corporate Islamic bond, or sukuk, issuances for the first time, law firm Trowers and Hamlins said yesterday.

Gulf corporates have issued $12.8 billion (Dh47bn) in conventional bonds over the 12 months to June 31, compared to $4.3bn in sukuk. There was a jump of 15 per cent in the value of conventional corporate bond issuance from last year's $11.2bn, while sukuk issuance fell 74 per cent from last year's $16.9bn.

"As the turmoil in the capital markets finally swept into the Gulf, the price of corporate sukuk fell much further than the region's corporate bonds. At one point the yield on corporate sukuk increased to 17 per cent while the yield on the comparable index of Gulf corporate bonds at that point only increased to 11 per cent," the firm said in a statement.

"As investors were demanding such high yields on sukuk it made sense for Gulf corporates to switch to issuing conventional bonds."

Neale Downes, Regional Banking and Finance Partner in the Trowers and Hamlins Bahrain office, said: "The fact that conventional corporate bond issuances have overtaken corporate sukuk issuances by such a large margin is unprecedented in the relatively short history of the Gulf's debt markets."

Downes said there was a combination of commercial or market-related factors that led to the steeper falls in the price of sukuk.

"During times of financial stress investors tend to avoid newer, complex and less tested forms of investment for more traditional investments – a trend from which sukuk are more likely to suffer from than conventional bonds," he said. "Real estate and construction companies have been relatively heavy issuers of sukuk so, as property prices in the Gulf took a hit, this may have had a knock-on impact on investor's attitude towards sukuk issued by companies in those sectors."

In 2007-2008, 38 per cent of sukuk issuance was by real estate companies whereas only five per cent of conventional Gulf corporate bond issuance was from real estate companies, said the firm.

"Enthusiasm among some Islamically compliant investors for sukuk might have taken a temporary knock when questions were raised as to whether all sukuk structures were strictly in accordance with Shariah law at the beginning of 2008," said Downes. "Of possibly even greater significance to how investors assess sukuk has been uncertainty whether, on the default of a sukuk, the investors will really have security over the assets on which the sukuk is based.

"When some originators have found themselves in financial trouble or have become insolvent, sukuk investors have found themselves unexpectedly competing with the general body of creditors, rather than simply enforcing against or taking possession of the assets 'supporting' their sukuk," he said.