Oil masks a faltering
Bond issuance in the Middle East is on course for its lowest year since before the financial crisis as borrowers baulk at the price investors are demanding for market access but bankers are optimistic that issuance will pick up in 2012.
The region’s credit have printed 24 deals for US$15bn in the first nine months of the year, a decline of 61% compared with the whole of 2010. While three months still remain, bankers are predicting little in the way of new issuance as volatility continues and a high oil price relieves the need for the region’s discretionary borrowers to tap the capital markets.
Emad Mostaque, a strategist for the Middle East and North Africa at Religare Capital Markets, said: “Looking back to the start of the year, the market dynamics were that oil was US$80 a barrel and that US$100 a barrel was a thing of the past. Now that a higher oil price is here to stay, there is little incentive for companies owned by oil-rich governments to seek additional funding, especially with investors demanding substantial new issue premia.”
Hopes were high at the start of the year, when bankers were forecasting about US$30bn of issuance, and by the end of the first quarter, supply had reached US$7.9bn, more than double for the equivalent period in 2010, but since then there has been a dramatic fall. The start of the Arab Spring at the beginning of the year prompted prospective issuers to back away because they did not want to pay increased spreads caused by political turmoil in the region. The second and third quarters were more noteworthy for companies that pulled deals than for those which have tapped the markets.
Plans on hold
In June, Etisalat, the UAE’s largest telecoms operator announced it had put its long-awaited US$8bn bond and sukuk programme on hold until at least 2012 due to political unrest after shelving plans to acquire a majority stake in Zain, Kuwait’s biggest phone company in March.
The Abu Dhabi firm is 60% owned by the Emirates Investment authority and its debt profile was seen as a proxy for UAE sovereign risk. While the programme’s establishment was seen as a critical part of its Zain acquisition plans, Etisalat has been linked with a DCM issue since July 2009, when it said it was targeting an MTN programme and benchmark-sized bond issue by the end of the year.
A month later, Abu Dhabi’s Dolphin Energy Limited, 51% owned by state fund Mubadala, delayed plans for an immediate bond issue due to market conditions. Dolphin Energy completed investor meetings for a 144a benchmark dollar bond expected to raise around US$1.9bn but pulled it after the eurozone debt crisis and uncertainty surrounding Greece hit sentiment.
The widening of spreads has been a concern for issuers in the Middle East looking to tap the bond markets,” Fabianna del Canto, director of emerging markets syndicate at Barclays Capital in London.
At least 60% of Middle East corporate bond issuance has been in dollars, meaning that while 10-year Treasury yields remain near record lows, investors have been demanding generous new issue concessions if they are to participate in dollar offerings.
“The US corporate bond market is a leading indicator of where premia are heading, “ said del Canto. “While coupons are at record lows for dollar issuers, new issue premia for top-notch US investment grade names have been on the order of 30bp or more.”
Also in July, Abu Dhabi’s Tourism Development & Investment Company developer of the emirate’s Guggenheim and Louvre museums, withdrew a bond issue while Dubai’s Majid Al Futtaim, the operator of numerous retail outlets in the Middle East, including Carrefour supermarkets, also shelved plans to sell debt the same month.
One syndicate head at a US bank said: “The oil price was a big factor in TDIC shelving its bond deal. It doesn’t need to fund.” The postponement of these plans exacerbated the regions’ summer slowdown.
TDIC is one of three quasi-government entities in Abu Dhabi that had been expected to start issuing bonds as it developed independent sources of funding. Mostaque said: “There is a desire to wean quasi-government entities off the government teat.”
Market tap may be shut off
However, bankers fear that quasi-sovereign entities could be prohibited from tapping the market after reports in May emerged that Abu Dhabi was planning to curtail bond sales by state companies to ease through the sale of sovereign bonds and ensure the firms’ actions benefit the economy. The review will affect Mubadala, International Petroleum Investment Co, Aabar, and TDIC. Abu Dhabi has not visited the sovereign bond market since its US$3bn, five and 10-year April 2009 debut issue.
Mubadala managed to push its issue through before the moratorium, pricing a US$1.5bn offering April split between five and ten year notes. Mubadala was able to tap the market before volatility hit but it showed that opportunistic issuers could access the markets at good rates – a point that some bankers argue is being lost amid the talk of volatility.
Peter Charles, head of DCM syndicate for Europe, the Middle East and Africa at Citigroup said: “Market access in the Middle East is not as narrow as some people perceive. In these conditions it has been tougher to pin down commitments from investors but spread widening has been more limited in the region than in others.”
In July, Citigroup was lead bookrunner on a US$650m sukuk issued by First Gulf Bank, the UAE lender controlled by Abu Dhabi’s ruling family that printed with a coupon of 3.797%. The deal saw strong regional demand as well as support from international investors seeking diversification, Clarke added.
Meanwhile, in September, Abu Dhabi Water and Electricity Authority (ADWEA) picked HSBC to advise on the $2.2bn refinancing of its Shuweihat 2 loan and plans to issue a bond, in a first for a Gulf Arab power project, bankers involved said. “Project finance is an area of growth and deals are easier to get away because they are easier to define and sell to the market,” said one banker on the deal.
“The Middle East is a story of the haves and have-nots,” said Mostaque. “If you are a quasi-sovereign they you have good access to funding but don’t really need it. If you are a family business that is struggling because a lack of loans in the SME sector then borrowing costs are high and you don’t want to issue.”
Qatari issuers, boosted by a flight to quality because their bonds are highly rated, are preparing a significant offering. Qatar National Bank is preparing a US$1bn issue as the emirate’s financial institutions beef up their balance sheets to fund a massive investment in infrastructure that will roll out between now and the 2022 World Cup. The state-controlled lender said at the end of August that it had set up a US$7.5bn medium-term note programme and hired Barclays, HSBC and QNB Capital to manage the sale. The money raised would be used for “normal operations,” it said.
Qatar’s banks need to raise funds for growth as the economy of the world’s biggest exporter of liquefied natural gas is forecast to expand 15.7% this year. The country plans to invest about US$88bn in infrastructure for the World Cup, Enrico Grino, Qatar National’s assistant general manager and head of project finance, said in May.
It is not clear when QNB will come to market, but it can afford to wait. It is state-owned, controls almost half of the country’s banking system and boasts a Tier 1 capital ratio of 25%.
The outlook for issuance in Dubai is improving following the emirates dramatic default in late 2009, as uprisings in Bahrain revived its safe-haven status. In June, the emirate sold a US$500m 10-year bond, which was priced at 375bp over mid-swaps and yielded 5.591%. “The fact that Dubai was able to price a bond with a 5% yield shows it has been rehabilitated in the eyes of investors, and how quickly they appear to have forgotten the sovereign default of 2009,” said Mostaque.
Last year marked Russia’s return to the sovereign bond market for the first time since its financial crisis in 1998 and the country enjoyed a surge in issuance in the first half of 2011 as strong oil prices and healthy corporate balance sheets created strong demand for Russian debt.
There was US$18bn of corporate and sovereign eurobond deals in the first six months of the year, compared with US$13.8bn in the first half of 2010. Corporate borrowers came to the fore, accounting for 83% of deals, compared with 60% last year.
“The main difference in bond issuance in Russia this year is that there has been an absence of supply from oil and gas companies because a strong oil price in the first half increased their cashflow and reduced their funding needs,” said Alexander Kudrin, head of fixed income research at Troika Dialog.
The exception was Novatek, Russia’s largest independent gas producer, which helped to get 2011 off to a flying start by raising US$1.25bn in a dual-tranche offering in January with a less than expected yield of 312.5bp over mid-swaps. The Novatek trade was postponed from 2010 but it contributed to US$4bn of supply in January alone.It was down to corporates from other sectors to fill the void and supply was heavy from the financial sector.
But the biggest single issuer was VimpelCom, which made two separate offerings to fund its US$6bn acquisitions of Egypt’s Orascom Telecom and Italy’s Wind. In January VimpelCom attracted US$7.5bn of orders for its US$1.5bn two-tranche Eurobond, and returned to the market in June with a US$2.2bn Triple tranche Reg S/144a through Barclays Capital, BNP Paribas, Citigroup, ING, HSBC and RBS just as credit markets were starting to tumble.
Issuance has slowed since July as risk-aversion towards emerging markets has set in. Kudrin added: “The primary market in Russia is closed and is likely to remain so until the resolution of the Greek debt crisis. The rouble has also lost 10% of its value amid fears over falling oil prices. Russia may benefit from the fact that investors are aware of the risks – it is a play on commodities prices, but it is not a safe haven.”
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