GCC Q2 bond issue hit by Euro crisis

But report expects good performance for bonds and sukuk in 2012

Bond issuance in Gulf oil producers lapsed in the second quarter of 2012 because of the Euro crisis after two strong quarters but prospects for both conventional and Islamic bonds are good this year, a key Saudi bank said.

“After two strong quarters, conventional bond issuance in the GCC was hit in Q2 as the Euro-zone crisis cast a shadow over the market,” said National Commercial Bank (NCB), the Gulf kingdom’s largest bank.

“Nonetheless, significant new activity did take place, partly thanks to the growing perception of the Gulf Cooperation Council (GCC) as one of the relative safe havens in an uncertain world,” it said in a study sent to Emirates 24/7.

The report said that during a time of a relative retreat by corporates, the market benefited from the resumption of sovereign issuance by Bahrain, Oman, and Kuwait. All in all, it added, the second quarter witnessed 22 GCC conventional bond issues with maturities in excess of a year.

The report put their combined value at around $4.6 billion and this was roughly equally split between corporate and sovereign issuance.

Although overall issuance in Q2 was somewhat down on the 1Q12 total of $5.9 billion, the performance of the market must be deemed generally impressive considering the backdrop of exceptional global uncertainty, NCB said.

“While it is clear that Western investors were active buyers of GCC issues, important development took place also on the supply side,” it said.

“In particular, there are growing indications of bonds increasingly playing a role as the classic reserve tire. As some jurisdictions continue to face restrictions in the area of bank funding, bonds in many cases service as an alternative.”

The report expected bond issuance activity to remain fairly robust in the coming quarters, partly because of refinancing requirements, thanks to formally approved issuance programs by a growing number of regional companies, mainly banks.

A number of regional governments are interested in using bonds and sukuk as a liquidity management tool while stimulating the development of the capital markets more broadly, the report noted.

Turning to sukuk (Islamic bonds), NCB said the market remained one of the “brightest spots” of the GCC financial sector over the past quarter.

Although overall issuance in Q2 fell short of the volumes seen in the opening months of the year, many of the positive trends observed during the past year have not only continued but been further consolidated,” it said.

According to the report, new types of issuers are tapping the market and activity has resumed even in the sovereign segment.

Its figures showed that the second quarter of 2012 saw a total of nine issues of more than a year with an aggregate value of $five billion. This was down on Q1 issuance of $8.3 billion but ahead of the $3.3 billion seen in 4Q11.

“In a departure from the commanding Saudi dominance during Q1, Saudi and UAE issuers were almost equally important. Three UAE names placed a total of $2.4 billion in the market while Saudi Arabia (including the Jeddah-domiciled Islamic Development Bank) saw a total of five issues worth just under $2.4 billion. One Kuwaiti issuer sold $101.6 million worth of sukuk.”

The report showed global sukuk issuance during the second quarter dropped to $23.9 billion from around $35.3 billion in Q1.

“In spite of the resilience of the Gulf region, Malaysia remains the dominant sukuk market internationally,” it said.

“Overall, Malaysia was home to 68 per cent of the $210 billion of sukuk outstanding globally as of the end of 2011.”

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