Gulf's bond and sukuk markets set to grow after slow start

Ratings agency S&P says new issues by Saudi Aramco and Saudi Telecoms will boost activity

  
Image used for illustrative purpose. Skyscrapers Against Sky.

Image used for illustrative purpose. Skyscrapers Against Sky.

Getty Images/Cleto Cordero / EyeEm

Bond and sukuk issuance by corporate entities in the Gulf Cooperation Council (GCC) is likely to pick up in 2019 after a slow start to the year when global capital markets were weighed by uncertainty, according to ratings agency S&P Global.

In a note published on Monday, the agency said that there had been "visibly lower issuances by GCC corporates" in the first three months of the year, with issuance to date standing at $1.1 billion.

Some $500 million of this was raised via a debut sukuk from Saudi food and beverage firm Almarai Company, and the remaining $600 million was issued by Bahrain's sovereign wealth fund, Mumtalakat.

"This (bond) situation is likely to change in the coming days and months, with the likes of Saudi Aramco and Saudi Telecom lining up to tap the international capital markets," S&P’s note said.

"With average yields on GCC bonds and sukuk having fallen in recent weeks to levels not seen since 2017, issuers see an opportunity to lock in lower rates on long-term borrowings," it said.

Saudi Aramco has begun marketing a debut $10 billion bond, whose prospectus lifted the lid on the state-owned oil giant’s finances for the first time.

Last year corporate issuance in the GCC increased by 86 percent to $15.6 billion, up from $8.4 billion in 2017, rival ratings agency Moody's Investor's Service said in a note in March. Some $1.8 billion of this was issued by new entrants to the market, including a mix of government-related entities and private sector firms such as Senaat, NMC Healthcare and Aldar Investment Properties.

Moreover, despite tough market conditions for issuers in sectors such as real estate and telecoms, the fact that yields on GCC bonds and sukuk have fallen in recent weeks “to levels not seen since 2017” means investors have an opportunity to lock in low rates on long term borrowings, S&P's note said.

Bond yields have been driven lower as investors have become more concerned about risks to global financial markets from events such as the trade dispute between the United States and China, and Britain's withdrawal from the European Union.

A Global Fixed Income survey published late last month by investment firm Invesco found that 49 percent of all fixed income investors thought the current economic cycle would last another one or two years, but more than a quarter expect the cycle to end within 6-12 months. Some 52 percent of U.S. investors expect the cycle to end earlier.

The survey of 146 fixed income specialists and chief investment officers representing $14.1 trillion of assets under management found that 60 percent expect credit spreads to widen over the next three years.

In a press release, Nick Tolchard, head of Middle East and Africa for Invesco Fixed Income, said investors were becoming increasingly uncertain "due to the growing list of potential risks, from both a geopolitical and markets perspective".

“Interestingly, fixed income investors across the global are considering a wide variety of portfolio strategies: some are targeting yield; some are seeking the safety of shorter durations or cash in case volatility spikes; and some want the flexibility of floating rate instruments," Tolchard said.

(Writing by Michael Fahy; Editing by Brinda Darasha)

(michael.fahy@refinitiv.com)

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