GCC corporate bond market stands at $12bn

Explicit guarantees mark new trend; high funding cost cooling off

Despite a number of corporate bond issuances, the debt pipeline in the GCC remains slow compared to last year, Emirates 24-7 study shows.

With less than three months to finish the year off, the GCC corporate bond market has about $12bn announced and closed bond offerings. This means the region would have to nearly double this figure to reach the $20.1bn corporate issuances raised during 2009.

But it may not be too late to catch up as the majority of issuances last year took place in the second half, with 77 issuances representing 61.1 per cent of the total number of issuances and 60 per cent of the aggregate volume, figures from Kuwait Financial Centre (Markaz) show.

According to data from Capital IQ, closed and announced bond offerings from January to September this year totals $12.3bn, with Qatari Diar’s $3.5bn bonds being the biggest, followed by Saudi Electric Company ($1.87bn), Waha Capital ($1.5bn) and Dubai Electricity and Water Authority ($1bn).

Continuing with the trend seen since 2003, conventional issuances raised the largest amount. Four out of 18 offerings are Islamic bonds (sukuk) and they are issued by the National Bank of Abu Dhabi ($154m), Saudi Arabia’s Ahmed Salem Bughsan Group ($100m) and Saudi Electric, figures from the Standard & Poor's business unit, show.

Two carried explicit government guarantees – Qatari Diar and Waha Capital - a rarity in the Gulf. Because of this, interest on these bonds was relatively low. The $1 billion five-year tranche sale from Diar bond yielded 3.5 per cent while its $2.5 billion 10-year tranche carries a 5 per cent coupon. Waha bonds, on the other hand, carried 3.925 per cent coupon, payable semi-annually in arrear commencing on January 28, 2011. The guaranteed bonds are due 2020.

The new trend is a result of credit rating agencies' previous downgrades on a number of government-related issuers, which opted to give implicit support. After the Dubai World debt standstill announcement in November, rating agencies have become particular in looking at whether a company benefits from an explicit guarantee from the government.

“At the end of the day, it’s not us who changed. It’s the investors – they want explicit guarantees,” Khalid Howladar, senior credit officer, Moody’s Investors Service, said.

Pricing
Interest rates are a mixed bag but pricing seems to have eased off from the high rates in the first half, which saw coupon rates of 10.75 per cent in February (Dar Al Arkan’s $450m bond), 8.5 per cent in April (Dewa’s $1bn bond) and 9.375 per cent in June (Burgan Bank’s $483m bond).

While many companies in the region have postponed issuances, Dar Al Arkan pushed its bonds programme because it had immediate refinancing needs with an earlier $600 million sukuk maturing in March.

To lower the costs, Dar Al Arkan in June completed a Shariah-compliant fixed-to-floating profit rate swap agreement for 50 per cent of the sukuk, or $225 million. As per the deal, the company will pay an annual coupon profit rate of 7.95 per cent, as compared to 10.75 per cent in February.

In the second half, however, rates have begun to cool down.

 The industry saw Burgan Bank’s $400m bond, its second issuance this year, carrying a 7.875 per cent coupon while the $26m bonds issued by Oman’s Al Omaniya Financial Services carry a 5.5 per cent coupon rate.

Despite noticeable difference in pricing, financial experts dismiss the thought that pricing in the first half was expensive. The interest rates, they said, simply reflect what the market was willing to pay for at that time.

“The pricing is determined by what the market at any point in time decides. That’s what price is all about,” Suresh Kumar, Emirates NBD Capital CEO, said. “An unsecured bond issue – rated or not rated – will be a function of what the investors are prepared to invest at and what the issuer is prepared to issue.”

Arabtec CFO Ziad Makhzoumi added: “You are raising externally so the market’s terms and conditions apply. Why would anybody give you a lower rate than they can get away with? At the end of the day, institutions are there to make a profit and they make a profit by including various factors like the cost of borrowing and the risk element. Whenever you come up with an interest rate on a bond or any facility, it must reflect those two factors.”

Debt market
With a three per cent debt to GDP ratio, the Middle East is the least region to derive its capital from debts, according to Nasser Saidi, DIFC chief economist. He said the region has primarily been reliant on oil and gas revenues and banking finance but the crisis has demonstrated that the region needs more and deeper pockets.

When the price of oil dipped in 2008, the region had to cut back on its spending, a scheme economists dub as a pro-cyclical measure. This could have not been the case, should the region have had a developed and matured debt market.

“The GCC countries lack additional important ingredients of a well-functioning debt capital market,” Saidi said. “There is little credit rating culture, unsatisfactory market transparency, lack of benchmarks, a dearth of long maturities, lack of a broad spectrum of institutional investors and the absence of a derivative market for managing interest rate and credit.”

In addition to creating a debt market, analysts also stress the need to develop the region’s local currency. Instead of using the surplus liquidity to other countries, Saidi said the capital can be redeployed to the home country.

Of the 18 announced and closed corporate bonds, nine are in US dollar, four in Kuwaiti dinar, two in Malaysian ringgit and one each in Omani riyal, Japanese yen and Saudi riyal. None have been issued in UAE dirham.

Some have proposed the region’s central banks to develop the local currency bond market by establishing a risk-free yield curve that reflect the opportunity costs of funds at each maturity.

This can be achieved through the issuance of treasury bills (T-bills),which is issued by the government short term financing requirements; or government bonds (bonds) which is issued by the government in the two-year, three-year, five-years and six-years. The proposal remains to be tested.

Overall, the amount raised from bonds and sukuk more than trebled from $22.7bn in 2008 to $72.7bn last year, according to Kuwait Financial Centre (Markaz). However, total value of GCC bonds and sukuk, issued during the first half of 2010 dropped 32 per cent to $24.2bn compared to the same period last year.

The GCC therefore has to face two issues. First is the limited and sovereign-related bond market, which as IMF amply puts it, remains the weakest among the world’s regions in terms of financial intermediation. Second is the limited bond market in local currencies, which would allow small open economies to absorb volatile capital flows.

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