Issuers from the Gulf region are preparing for their return to the international debt capital markets after a month of no supply due to the war in the Middle East.

The new issue market in CEEMEA reopened on Tuesday with a surprising deal by Angola, while the Republic of Srpska opened issuance from Central and Eastern Europe on Thursday (excluding a tap earlier in March by Polish refiner Orlen).

The Middle East could soon follow, subject to headlines. “Discussions have started,” said a DCM banker in Dubai, on the prospects of supply resuming from the region.

“The conversation is shifting towards issuers asking ‘tell me how investors are feeling, tell me what new issue premiums look like and is there duration appetite?’ So the discussions are on getting back to the market.”

Another DCM banker said his firm was working on Middle East issuance for the coming week. "Nothing is impossible," he said.

The region has become a significant contributor to EM primary market volumes, with Saudi Arabia the biggest jurisdiction for foreign currency supply last year. This year also got off to a fast start, and while things had naturally slowed last month because of Ramadan, issuance was continuing to tick over, with deals lined up for March.

Until the war broke out, at least 10–15 issuers from the region had been expected in March. Now, bankers are spending time with clients to explain how conditions have changed.

“The education phase has begun,” said the first DCM banker. “That’s an important stage to getting towards mandates. Investors are saying they will look at a deal as long as it comes with an appropriate new issue premium.” 

He said the premium being sought by investors is 25bp–30bp for a high-rated borrower.

That premium is to accommodate the wider levels, but also take into account market uncertainty amid confusing signals from US president Donald Trump on the war's outlook.

Faisal Ali, senior portfolio manager at Azimut, went further and said any deal would have to pay a new issue premium of around 50bp. "It has to be priced pretty attractively and pay a decent new issue concession to tempt investors,” he said.

Ali said he is buying only in small size in the secondary market. “When we see something attractive, we’re buying but it’s still very opportunistic and nothing much, just small sizes here and there in secondaries,” he said. “We’re focusing on investment-grade bonds in short tenors and preferring to buy and hold.”

Higher-rated

Bankers say the first deal will likely be a conventional bond rather than sukuk and from one of the higher-rated and most established names in the region. “A lot of investors in Western Europe and the US are showing a higher level of keenness," said the first DCM banker. "Whereas it remains to be seen how much depth there is in regional demand for sukuk right now."

Regional investors have tended to anchor sukuk transactions and have often been less price sensitive than US or European accounts. "Will that cash still be there?" asked a syndicate banker.

As for which issuer might go first, people expect a blue-chip credit. “It’s still too early to say ... but issuers like Aramco or Saudi Arabia are possibilities," said Ali, because of the fiscal gains from higher oil prices. But whichever issuer it is, he said “it has to be a sovereign or quasi-sovereign".

On hold

Issuers that will require more investor work will have to wait. Before the war began a debut corporate from the UAE, for example, had been eyeing a deal for early April, according to a second syndicate banker. That looks likely to stay on hold.  

One sector firmly on the sidelines is real estate. Developers in the UAE especially continue to be affected by the war, which is leading rating agencies to take action. On Thursday, Fitch put Arada’s long-term issuer rating of B+ and its senior unsecured rating of BB– on rating watch negative. 

The agency's analysts said the move “reflects heightened geopolitical risk affecting UAE and the Gulf region, which could hamper housing and investor demand".

Arada joins Binghatti and Omniyat being placed on rating watch negative by Fitch since the war began.

Recent UAE real estate bonds have sold off significantly: Binghatti's US$500m August 2031 sukuk, which were issued at a yield of 8.375% on February 5, are bid at 14%, according to LSEG. They are quoted at a G-spread of about 1,000bp, having priced at 461.3bp over Treasuries.

Even so, market participants are optimistic on the sector's outlook. “This is an example of levels not being representative of the balance sheets of these companies,” said the first DCM banker. “They remain extremely resilient and have good cash positions.”

“We are monitoring the high-yield space,” said Ali. “Credit profiles have weakened but we don’t see them getting distressed or defaulting.”

Source: IFR