Gulf Issuers Try Out New Bond Formats

Share with others:


Print Email Read Later

DUBAI -- Gulf bond issuers are tapping new bond structures and investors as the energy-rich region embarks on big infrastructure projects, bolsters ties with Asia, and capitalizes on investor appetite for its highly rated paper. Depending on what investors are being catered to, the bonds often have exotic nicknames like Dim Sum for China or Uridashi for Japan.

With global interest rates low, bond buyers around the world are hunting for higher yields and are buying Gulf bonds. They are attracted by the region's mostly high-rated sovereign credits and yields that are often higher than other similar-rated issues in other jurisdictions. They are being paid a premium for perceived geopolitical risk in the Gulf.

Total Gulf bond issuance in 2012 rose to $42 billion from $25 billion a year earlier, including sukuk, or Islamic bonds. Sukuk sales in 2012 nearly quadrupled to $21.3 billion from $5.7 billion a year earlier, according to data provider Dealogic.

Dubai, which suffered from a debt crisis in 2009, sold its first 30-year bond in January, benefiting from renewed investor confidence in its economy and debt restructuring.

Gulf governments are also looking at bonds to finance a construction pipeline exceeding $1 trillion for projects like building airports in Saudi Arabia and power plants in the United Arab Emirates.

The bond funding fervor is building at a time when Gulf equity markets are weak. In addition local currency bond markets are small, while both European and some local banks face tighter rules on lending.

Gulf banks are becoming more inventive bond issuers because they need to diversify funding sources and beef up their capital to meet the stricter capital rules under the Basel III global banking standards.

"The regional issuers want to tap into a larger investor base" than is available in the dollar market, "and to do so they are targeting markets where you have large pools of investors who invest in local currency," said Georges Elhedery, head of global markets for the Middle East and North Africa for HSBC. "Japan, Hong Kong, Switzerland and Malaysia are clear examples of that."

The National Bank of Abu Dhabi, the largest U.A.E. lender by market value, offered in February the region's first Uridashi bond, which are foreign-currency securities sold to Japanese investors. In 2011 it sold a samurai bond, an instrument denominated in yen and issued by a non-Japanese firm.

In February N.B.A.D. also sold its first kangaroo bond as part of a debt program of 2 two billion Australian dollars, or $2.6 billion.

" Whilst N.B.A.D. could have printed a considerable time ago, a key objective for printing in the Australian dollar and in fact any new market was to gain diversification of our funding base, and as such we had a clear requirement that any inaugural Australian-dollar trade would need to have at least 50 percent placed into the domestic accounts," said Stephen Jordan, the bank's group treasurer.

Emirates NBD, the U.A.E.'s biggest lender by assets, issued the region's first "Dim Sum" bond last year. These are offshore renminbi securities issued outside mainland China.

Emirates NBD, N.B.A.D., Qatar National Bank and others are opening or already have branches in China to capture growth in the world's second-largest economy and a huge consumer of Gulf oil and gas. They are also focusing on other Asian countries.

Last year, the state-owned Qatar Petroleum issued Qatar's first samurai bond as it sold more of its gas to Japan, the world's No. 1 L.N.G. importer.

The Gulf region is not just selling more oil and natural gas to Asia, it is also tightening its financial and trade ties, leading to more bond issuance in Asian currencies, particularly the Malaysian ringgit. Malaysia is attractive to Gulf issuers because it is the world's biggest market for sukuk, which are bonds that comply with Islam's ban on interest payments.

The market growing fastest in the Gulf is sukuk, or Islamic bonds. Oman, the last Gulf state to introduce Islamic finance, is preparing a sukuk debut, while Dubai announced plans this year to become an Islamic finance center.

Even state-owned Saudi Aramco has gone the sukuk route, issuing one of the instruments to finance a joint-venture refinery with Total of France.

Abu Dhabi Islamic Bank, a lender that complies with Islamic law, broke ground by issuing a perpetual Islamic bond that does not have a maturity date and is treated more like a stock.

Despite its novelty, the $1 billion bond received $15 billion in orders and was followed in March with a similar issue from Dubai Islamic Bank.

"Bank capital has gone through a lot of regulatory innovations in recent years, and with investors getting more and more yield hungry, these types of structures become attractive especially for private banking accounts," said Abdul Kadir Hussain, chief executive officer at Dubai's investment banking and asset management firm Mashreq Capital.

Gulf interest in sukuk coincides with a global appetite for Islamic instruments. Global sukuk demand is forecast to triple to $900 billion by 2017, and supply is unlikely to meet that figure, Ernst & Young said in September.

Strong demand has allowed many Gulf firms to sell sukuk at a lower cost than bonds in 2012 and could lead to more issuers shifting from bond to sukuk sales and selling sukuk in new currencies like Turkish liras, analysts say.

Turkey sold its first Islamic bond in 2012 and is seeking to build an Islamic finance industry, while Egypt may have a debut one this year as Islamic parties that rose to power in the Middle East embrace Islamic finance.

But novel structures and currencies are unlikely to become the norm. All Gulf currencies, except the Kuwaiti dinar, are pegged to the dollar, and new currency issues carry foreign exchange risk.

New bond structures, like project or hybrid, are infrequent and take time to structure.

"The most interesting prospect is the number of new issuers potentially coming to the market, which is more positive than anytime in the last two to three years because they see the strength of the market and increasing investor interest, " said Stuart Anderson, head of Middle East at rating agency Standard & Poor's.

world

This article originally appeared in The New York Times.


Advertisement
Advertisement
Advertisement

You have 2 remaining free articles this month

Try unlimited digital access

If you are an existing subscriber,
link your account for free access. Start here

You’ve reached the limit of free articles this month.

To continue unlimited reading

If you are an existing subscriber,
link your account for free access. Start here