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Unrest stifles GCC bond market

But IPO activity improves with new issues in UAE and Saudi Arabia
The bond market in Gulf oil producers has remained stifled by political unrest in the region despite regional economic recovery and some landmark issuances, Saudi Arabia's largest bank said on Monday.

By contrast, initial public offering (IPO) activity gained pace in the second quarter compared with the previous quarter of two key issues in the UAE and one in Saudi Arabia, National Commercial Bank ( NCB ) said in a study on the capital markets in the six-nation Gulf Cooperation Council (GCC).

"The development of the GCC bond and sukuk markets was little different in Q2 from the opening months of the year when the 'Arab Spring' depressed issuance activity," said the study, sent to Emirates 24/7.

"Even as a number of landmark issues provided some encouragement, neither the issuer numbers nor issuance volumes changed markedly....as a result, the regional markets are far from regaining the momentum they experienced during the last quarter of 2010, although various structural drivers suggest that this can happen relatively quickly once the market conditions normalize."

The report showed the second quarter saw five GCC bond/sukuk issuances in excess of $500 million and one that fell just short of that.

Issuance in the conventional space was led by Mubadala, Emirates Airline, and the Government of Dubai. In the Shariah-compliant segment, the most important issuers were the Islamic Development Bank , HSBC Bank Middle East, and Sharjah Islamic Bank, according to NCB .

In total, the conventional space saw five issuances with an aggregate value of $3.40 billion. Apart from ongoing short-term issuances by the Central Bank of Bahrain , there were four sukuk offerings with an aggregate value of $2.18 billion.

"Compared to Q1, this represented mixed progress. Excluding the exceptional QR50 billion bond and sukuk issuance by the Government of Qatar, the corresponding figures in were $4.79 billion in the conventional space and $1.30bn for sukuk," the study said.

"In terms of jurisdictions, issuance activity was dominated by Abu Dhabi which has generally been the main source of new offerings in the region during entire first half of the year. Overall, UAE names accounted for just under three-quarters of the total bond and sukuk issuance during Q2."

By contrast, the study added, Saudi names - with the exception of the Jeddah-headquartered Islamic Development Bank - were notable through their absence. Bahrain, thanks to ongoing issuance by the Central Bank of Bahrain , was the only other GCC market to see activity during the quarter apart from a small corporate offering in Oman, it said.

"As a result, the positive market trends had an unusually narrow geographic footprint during the quarter."

Concerning corporate issuance, the report showed that UAE names accounted for virtually all the corporate issuance activity in Q2.

It noted that Mubadala in April issued $750 million of five-year bonds at 180bps and $750 million of 10-year bonds at 210 bps over US Treasuries.

Another major corporate deal during the quarter was a $one billion five-year issuance by the Emirates airline. The bond carried a 5.125 per cent coupon.

The airline described the issue as an exploratory step in diversifying its capital sources. All other conventional issuers were in the financial sector.

Emirates NBD issued a $332.5mn floating-rate seven-year bond in May. HSBC Bank Middle East made a $60.5mn five-year issue in June as part of its ongoing program. Al Omaniya Financial Services place a small RO1.1 million issue in April in response to regulatory obligations.

Aabar Investments issued a EUR1.25 billion exchangeable bond over Daimler shares in May. The size was increased from an original EUR750mn. The five-year issuance carries a coupon of four per cent.

As for sovereign bonds, the report showed the most important issuance event of the quarter was the return of the Government of Dubai to the market.

It noted that Dubai in mid-June launched a $500 million 10-year bond at 5.59 per cent as part of its $five billion Euro medium-term note programme.

"By June, Dubai was no longer among the 10 government deemed likeliest to default. Dubai CDS peaked at 655 bps in February 2010 and have halved since then, NCB said, adding that the Dubai government's total direct debt is $31 billion and that its budget deficit more than halved to Dh six billion in 2009.

By contrast, Bahrain abandoned plans for a $one billion bond in the spring, although it made one of its regular BD200 million sukuk al ijarah issues.

According to NCB , the GCC's sukuk (Islamic bonds) market saw a far more impressive rebound during the quarter than the conventional space.

It showed total number of issues in the GCC increased from seven in Q1 to ten during Q2, although the total proceeds were down significantly from over $10.4 billion in Q1 to around $2.4 billion during Q2.

"As for IPO, the second quarter marked a comeback for the GCC's IPO market from the sharp correction they underwent during the opening months of the year...two UAE companies and one Saudi issuer came to the market in Q2."

The report showed the second quarter saw total IPO value of $346 million, as compared to $409.2 million a year earlier. By contrast, the only issue during Q1 had been a small mandatory Dh66 million issuance by the Insurance House which listed on the Abu Dhabi Securities Exchange on 20 June.

"In spite of the recovery, the scale of the Q2 issuances was modest by historical standards. The total value of the IPOs fell short of all four quarters of 2010."

© Emirates 24|7 2011