Gulf bonds to attract overseas investment

DUBAI: GCC 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 GCC issuers were seen as curiosities rather than mainstream assets by global investors, partly because of geopolitical risk and poor trading liquidity.

That perception changed during 2012, Standard Chartered head of debt capital markets for the Middle East, North Africa and Pakistan Salman Ansari said.

“The first quarter will be busier – interest rate levels are attractive, there is abundant secondary liquidity and the cost of borrowing is at its most attractive in recent memory,” he said.

“The diversity from the GCC this year, in terms of issuance, pricing and tenures, and the number of “firsts” bode well for the region to showcase itself to international investors.”

Total bond and sukuk issuance from the region this year exceeded $40 billion after a lacklustre 2011, when volume was below $30bn. More than a third of this year’s total issuance was in the final quarter.

Yields on bonds plunged in 2012 and the majority were oversubscribed, especially sukuks and those from the top-rated credits. Qatar’s $4bn, two-tranche sukuk issued in July attracted an order book of over $25bn.

The global financial crisis and quantitative easing by central banks abroad created pools of money 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 trends in 2012 suggested growth in Gulf issuance could continue.

One shift was that regional borrowers became more opportunistic, exploring issuance in 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 tapped the yuan market this year.

“We’ll see the GCC continue to look east for funding,” he said, adding deals reflected the growing importance of the Asian investor base.

He said from the point of view of investors, the GCC had achieved an attractive variety of issuers in 2012.

Much bond issuance in 2012 was to refinance maturities and about $50bn 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 firms in the region have repaid maturing bonds on time. So for borrowers and lenders, bonds may often look more attractive as refinancing options than bank loans.

gulf-daily-news,December 26, 2012