The bond guarantee scheme announced by the UAE Government and cleared by Federal National Council (FNC) brings hope to banks at a time when they face the music from the Central Bank over high lending-deposit ratios and a fast-growing asset book.
The Central Bank has gone to the extent of asking banks to confine their asset growth to 10 per cent in order to retain the health of their balance sheets.
Although a series of bonds have been issued in the regional primary market in the past few months, most of them have come from either sovereign or quasi-sovereign entities.
Corporates and financial institutions are still out of favour with the regional and international investor community considering local liquidity is still tight and the market is still reeling from the downside in the real estate market. Local banks have significant exposure to corporate and personal loans, which have not started showing any signs of recovery.
The recent negative news about the debt restructuring at the Saad and Algosaibi groups of Saudi Arabia would also not reflect positively on the financial soundness and transparency of the local banks' balance sheets.
The UAE Central Bank has already convened two meetings of the local banks affected in order to measure the extent of exposure and to work out ways to pull the lenders out of any such crisis situation.
Banks such as Emirates NBD, Abu Dhabi Commercial Bank, Mashreq and National Bank of Abu Dhabi, have bonds maturing in 2009 and 2010 which can be refinanced using the Central Bank bond guarantee and this will help them to avoid paying high costs.
Once a few banks have issued debt, other banks in the region that need liquidity can also come to the market.
For example, Commercial Bank of Dubai (CBD) has already announced its intention to raise money through this scheme.
Most of the debt issued in this region is in the five-year bucket and from that perspective the Central Bank has hit the right note by keeping the maturity of the guarantee for five years. The things that need further clarity are the fees associated with such issuance and the capital structure, which will be supported by the programme. Once the framework of the programme has been laid out in clarity, expect a flurry of issuances from the banks in the region in coming quarters.
The erosion of trust the Saudi episode has triggered has cost a lot to the system, especially at a time when the banks have started to regain the lost strength and there is fear that this could have a negative impact on the prospective bond issuance market.
"The recovery rally seen in the global markets since the beginning of March has also started to falter with the much anticipated economic growth failing to materialise in the largest economies of the world.
This has increased the risk averseness in the markets which makes it more difficult for the borrowers to raise money from the markets. Once seen in this context, the central bank guarantee is a big positive step in helping the regional banks meeting their borrowing needs," said Ram Mohan, a
Dubai-based consultant on fixed-income products.
At the height of the credit crisis in 2008, even the US Government had to embark on a similar programme to help the banks raise money from international markets.
Under the umbrella of the Federal Deposit Insurance Corporation (FDIC), the much-talked-about scheme called the Temporary Liquidity Guarantee Programme (TLGP) was launched where banks could issue senior unsecured debt with the full backing of the US Government (meaning a AAA rating) up to a maturity of 10 years.
The scheme was a resounding success and was used by all the major banks and financial institutions, including Goldman Sachs, Morgan Stanley, Citibank, GE Capital, Wells Fargo and Bank of America.
"The guaranteed pricing for the debt has been done in a tiered fashion to match the maturities of the debt issued under this programme as the initial flat fee of 75 basis points decided would have raised the cost of the short term issues to make it uneconomical," said Mohan.
The FDIC provided the guarantee on senior unsecured bank debt ensuring creditors get a timely payment of principal and interest in the event of a default.
Before the FDIC scheme, with reputed investment banks going down under or merging, borrowers were reluctant to subscribe to debt from a company they were not sure will be on solid footing many years from now, and the market had been wary of taking on assets.
The TLGP scheme helped get around both of those problems, because it guaranteed losses borrowers might suffer if the bank could not pay, and it helped banks issue loans despite holding assets that might scare some investors.
With the initial issuance (in December 2008) spread close to 200bps over the respective US Treasury, the FDIC guaranteed spreads steadily narrowed since then with the markets gaining confidence, and by the second quarter of 2009, the spreads had narrowed to close to 75bps for new issuances.
The interesting side, Mohan said, is that after months of issuing debt under the FDIC guarantee, the stronger banks in the US have started to issue debt without FDIC backing.
JP Morgan, Goldman Sachs, Morgan Stanley and US Bancorp have issued non-guaranteed debt of around $15bn in the past couple of months. Under the TLGP scheme, these entities had issued around $100bn of guaranteed debt.
This goes to prove that the government guarantee proved to be a great relief at the time of crisis and when the markets have become better, the banks are in a position to go it alone into the market.
- The author is Banking Editor, Emirates Business
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