Traders shun Maldives bonds as Sukuk default looms
A selloff in Islamic bonds from the Maldives has intensified in recent weeks as investors rush to dump the island nation’s debt on fears of default. The dollar-denominated sukuk bonds due 2026 dropped below 70 cents on the dollar this week, a record low.
With double-digit losses this month, the debt is the worst performer on the Bloomberg EM Sovereign Total Return Index. The notes traded at 69,5 cents on Wednesday, down from about 93 cents in June.
“We sold the majority of our bonds in early summer, as we saw FX reserves were falling, since then things are clearly much, much worse,” said Soeren Moerch, a portfolio manager at Danske Bank.
“The big question is now whether the Muslim countries will ‘allow’ Maldives to default on a sukuk bond.” No government has ever defaulted on that type of debt.
The notes came under renewed pressure over the past two weeks after Bank of Maldives, the archipelago’s biggest commercial bank, introduced new limits on spending in foreign currency for its customers.
Fitch Ratings also downgraded the country’s standing for the second time since June, citing increased default risk.
Those decisions spooked many bondholders. The Maldives has about US$500 million in outstanding sukuk debt due in 2026, according to data compiled by Bloomberg, and now all eyes will be on the next coupon payment date on October 8.
“The default risk in the Maldives sukuks has increased as the country has large external payments coming due and not enough FX reserves to service them,” said Purvi Harlalka, a senior emerging-market sovereign debt strategist at M&G.
“Barring an eleventh-hour infusion of foreign exchange from a friendly overseas government such as China, GCC or India, the non-payment of the October coupon is a plausible possibility.”