Gulf Arab bonds will attract large flows of investment from outside the region next year because of their growing diversity and an increasingly active secondary market, a major participant in the industry says.
Traditionally, bonds from issuers in the six-nation Gulf Cooperation Council were seen as curiosities rather than as mainstream assets by many international investors, partly because of geopolitical risk and poor trading liquidity.
That perception changed substantially during 2012, Salman Ansari, regional head of debt capital markets for the Middle East, North Africa and Pakistan at Standard Chartered, told Reuters in an interview.
“Q1 will be busier than it has been in past years - interest rate levels are attractive, there is abundant secondary liquidity, and the cost of borrowing is at its most attractive in recent memory,” Ansari said.
“The diversity from the GCC this year, in terms of issuance, pricing and tenors, and the number of “firsts” we’ve seen, bodes well for the region to showcase itself to the international investor community.”
Total bond and sukuk issuance from the region this year easily exceeded $40 billion after a lackluster 2011, when volume was below $30 billion. More than a third of this year’s total issuance was in the final quarter.
Yields on outstanding bonds plunged in 2012 and a large majority of issues were heavily oversubscribed, especially sukuk deals and those from the top-rated credits. For example, Qatar’s $4 billion, two-tranche sukuk issued in July attracted a spectacular order book of over $25 billion.
To some extent, the Gulf was simply lucky this year. The global financial crisis and quantitative easing by central banks abroad created pools of money that were desperate for yield; some entered the Gulf because they found nowhere else to go.
In the case of sukuk, a particularly wide supply-demand imbalance opened up as issuance failed to keep pace with the size of Islamic funds swollen by the Gulf’s oil export earnings.
But Ansari said several trends in 2012 suggested growth in Gulf issuance could continue even if global conditions became somewhat less ideal.
One shift, he said, was that regional borrowers became more flexible and opportunistic, exploring issuance in a range of foreign currencies and with unusual structures.
In March Emirates NBD, Dubai’s biggest bank, became the first GCC borrower to issue a yuan bond, reflecting growing trade ties with China. National Bank of Abu Dhabi also tapped the yuan market this year.
“We’ll see the GCC continue to look east for funding,” Ansari said, adding that deals in yuan, Malaysian ringgit and Japanese yen this year reflected the growing importance of the Asian investor base.
He also said that from the point of view of investors, the GCC had achieved an attractive variety of issuers in 2012.
“Issuance in 2013 was very evenly split between sovereign, corporate and GREs (government-related entities), and this is the best demonstration of the maturity of the MENA market. I expect this to continue to be the case in 2013.”
Standard Chartered is among the biggest global banks active in Middle East debt markets. At the end of the third quarter, it was ranked second in the Thomson Reuters Middle East Emerging Market Bonds bookrunning league table, involved in 41 percent of deals run by the top ten banks.
Motives to issue
Much bond issuance in 2012 was to refinance existing maturities, particularly for debt-laden Dubai; the emirate successfully repaid its three major bond maturities in 2012.
That source of supply is likely to remain important next year; Ansari estimated that about $50 billion of bond and loan redemptions would come due from the GCC in 2013.
European banks are cutting back exposure to the Gulf because of their financial problems back home, while companies around the region have repaid maturing bonds on time even as they take a hard line in loan restructuring talks. So for both borrowers and lenders, bonds may often look more attractive as refinancing options than bank loans.
Increasingly, however, GCC companies may issue bonds not to refinance but to expand, as regional economies and real estate markets continue to recover from the 2009-2010 crash, and as firms seize foreign investment opportunities created by the Arab Spring and the global crisis.
Dubai mall developer Majid Al Futtaim (MAF) Holding, which issued the region’s first investment-grade corporate bond this year, is in talks with Egypt's Mansour Group, owned by billionaire Mohammed Mansour, to buy its supermarket business in a deal valued at $200 million to $300 million, sources familiar with the discussions told Reuters this week.
Qatar National Bank, which issued $2 billion in bonds this year, is buying Societe Generale’s Egyptian unit for $2 billion, and has control of a top Turkish bank in its sights.
And Bahrain Telecommunications Co (Batelco), which has agreed to buy Cable & Wireless Communications' assets in Monaco and some islands in a deal worth up to $1 billion, may issue bonds as part of a funding package for the deal.
In addition, the phase-in of Basel III global capital adequacy rules is likely to encourage Gulf banks to issue bonds to raise capital.
In November, Standard Chartered was mandated on the first globally issued, perpetual hybrid sukuk to raise Tier 1 capital, a $1 billion deal from Abu Dhabi Islamic Bank. The deal drew orders of over $15 billion and appealed to private banks, particularly in Asia.
Asked if more financial institutions might follow ADIB’s example, Ansari said: “ADIB is a good test case and is likely to influence other potential borrowers. There is no doubt about available liquidity and appeal of the structure, but it will come down to pricing.”
A sign of Gulf issuers’ growing focus on investors from outside the region came when NBAD targeted them with a $750 million, seven-year deal during this year’s Muslim holy month of Ramadan, when regional activity is traditionally slow. Seventy-five percent of the bond was placed outside the region.
In the past, poor secondary market liquidity in Gulf bonds deterred international investors; they felt that during times such as Dubai's 2009-2010 debt crisis, there would be no way for them to escape.
But secondary market trade, even in sukuk which are traditionally bought and held until maturity, may now have increased enough to reduce the perception of risk.
“International investors take a lot of comfort from the strong liquidity onshore. There is a very strong local bid in the secondary market, which has helped avoid the sell-off which might be seen amid periods of market weakness,” Ansari said.
“The demand we’ve seen this year, the strong performance of spreads, the rally on secondary markets - I don’t believe this is a short-term view on the part of investors. More investors are becoming stakeholders in the region.”