IPO market shows recovery signs

Capital markets in the Gulf Cooperative Council (GCC) saw another below par performance in the first half of 2011, with the number of floats reducing by 50 per cent to four compared to the eight initial public offerings (IPOs) in the first half of 2010, tax and advisory consultancy PwC said on Thursday in a research note.

However, the agency noted that while last year, the regional IPO activity was dominated by Saudi Arabia’s Tadawul, the UAE bourses were the most active in the region accounting for three out of the four IPOs in the first half of 2011 and representing 74 per cent of the total capital raised.

Eshraq Properties Company, a real estate company in the UAE, raised $225m on the Abu Dhabi Stock Exchange and accounted for 63 per cent of the total amount raised in the GCC. The fully-subscribed Eshraq Properties drew a number of local institutional investors as well as GCC investors. 

Saudi Integrated Telecom Company’s was the only IPO on Tadawul raising $93m in May this year and this performance was in sharp contrast to the seven IPOs in the first half of 2010 which raised $685m. The two other IPOs in the UAE during the first half included the $18m issue by Insurance House and a $22m issue by Wataniya.

Nevertheless, overall the GCC markets remained largely subdued against a backdrop of political unrest in the Arab world with further reports of delays and postponements in IPOs, PwC said, adding that these concerns have impacted IPO pricing discussions, contributing to reported tensions in relationships between the sell side community and investors.

Deal values in H1 2011 plummeted 57 per cent to $358m as compared to the $830m raised during the same period last year. PwC believes that the drop in the first half of 2011 in both the number and value of GCC IPOs is reflective of the continuing investor caution in light of current global economic uncertainties which has weighed down demand for new issues.

Steve Drake, Head of PwC Capital Markets Middle East, said: “The three IPOs in the UAE during the first half have brought a much-awaited end to the drought of IPOs on the UAE exchanges. Most notably, the IPO by Eshraq Properties, a company in the recession-hit real estate sector, is a major confidence booster for both the investors as well as other companies looking to IPO in the near future.

“We have also seen continued interest in equity offerings by regional companies looking to list on international markets where there are perceived valuation benefits in certain sectors such as oil and gas. We believe that there is pent up demand for IPO capital in the market, however, realistic pricing and a strong growth story are crucial to draw investor interest and market demand.

“Although the Saudi market has been uncharacteristically quiet in terms of IPOs in the first half of 2011, from what we are seeing, we anticipate a number of flotations coming to the Tadawul in the second half. However, with the arrival of the holy month of Ramadan and the summer holiday period, late September or early October is likely to be the earliest we see the next Saudi IPO.”

The debt market in the GCC continues to grow with 2011 first half-year results improving compared to the same period last year. However, a large proportion of the debt issues in the first half of 2011 were sovereign and government-related entities and amongst the most prominent were the bonds and sukuk issued by the Qatar Central Bank amounting to $13.7bn in total.

Performance of corporate issuances on a stand-alone basis was mixed during the first half of this year as the political unrest in the GCC had a negative impact, especially during the March-April period. The majority of the corporate debt issuances during the first half of 2011 have targeted the Euro Market where lenders have shown continued appetite for GCC bonds. The tenures for such issuances ranged between three to 15 years and there were no short-term issuances.

The largest corporate issuance in the period was the $4.3bn bond by the International Petroleum Investment Company which was split into a £550m, 15-year component and two €1.25b tranches with five- and ten-year tenures, respectively. The coupon varied between 4.875 and 6.875 per cent.

Other major conventional issuances included the $1.8bn issue by Abu Dhabi’s Aabar Investments carrying a coupon rate of 4 per cent and a tenure of five years and the $1b issue by UAE-based Emirates airlines with a coupon rate of 5.125 per cent and also having a tenure of five years.

As with the bond market, the sukuk issuances in the first half were pre- dominantly boosted by the $9.1b issuance by Qatar Central Bank. Other corporate sukuk issuances in the GCC region included the $750m issuance by Islamic Development Bank, the $500m by Emaar Properties, the $400m by Sharjah Islamic Bank, and the $267m by Bank Al Jazira.

Drake added: “The debt market is valued at about $1 trillion globally and Islamic finance is forecast to grow at 15 to 20 per cent a year. The Islamic finance market has provided lenders a prolific mode of diversifying their revenue streams from the conventional modes and we have seen a growing preference of this mode by the financial sector in the GCC.

“With the refinancing requirements for regional entities fast approaching and political stability returning to the region, we see a strong pipeline of issuances in the near term. However, as we know, there is a high inter-dependency between the performance of the GCC markets and the international markets. The sovereign debt woes of the US, Greece and other European countries have sent shockwaves in the international market with increased financial volatility and risk rating downgrades, it remains to be seen how the GCC debt issuances will be impacted.”

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