Abu Dhabi: Abu Dhabi’s possible $800 million bond offering for a power plant may kickstart Arabian Gulf project bond sales as regional yields fall to near seven-year lows and governments spend oil wealth on infrastructure.
Abu Dhabi National Energy Co and its partners in the Shuweihat S2 plant will sell debt in October to refinance loans, two bankers with knowledge of the matter said in the past week. Middle East bond sales almost doubled to $30 billion (Dh110 billion) in 2012, compared with a 29 per cent gain in emerging-market sales, data compiled by Bloomberg show.
Project finance bonds are luring more companies in the Gulf Cooperation Council as average Middle East corporate bond yields plunged 133 basis points to 3.9 per cent on August 7, the lowest since February 2005, according to HSBC/Nasdaq Dubai’s Middle East Conventional Corporate US Dollar Bond Index. The bonds are secured by developments such as roads or energy plants and pay the coupon and principal from cashflows.
“It’s a new way to access capital for issuers and provides new investment opportunities for institutions,” Jarmo Kotilaine, chief economist at National Commercial Bank in Jeddah, Saudi Arabia, said by phone yesterday. “You need to find a way to make it competitively priced.”
New projects
Selling debt linked to projects is timely for the GCC as governments pour money into infrastructure and industry, including plans to invest more than $500 billion in Saudi Arabia and $100 billion in Qatar. Dolphin Energy Ltd, started in 2001 to pipe gas from Qatar to the UAE in 2007 and Oman a year later attracted eight times the amount sought in a $1 billion project bond sale in February.
Abu Dhabi is building power generation capacity to meet rising demand as the population grows and the state pursues industrial and petrochemical projects to reduce its reliance on oil. The largest of the UAE emirates holds about 6 per cent of the world’s proven oil reserves.
Taqa, as Abu Dhabi National is known, and partners including GDF Suez SA and Marubeni Corp, will use bond proceeds to refinance debt-construction loans arranged in 2009 during the global financial crisis, when borrowing costs were higher, said the bankers, who declined to be identified because the information is private.
The Shuweihat S2 plant, a natural gas-fired power plant located 250 kilometres southwest of Abu Dhabi, started operations last year.
Yields drop
By introducing project bonds, “you’re helping move up the risk curve” of the regional debt market, said Shehzad Janab, the head of asset management at Daman Investments in Dubai. “It gives investors more risk exposure and helps make for a more- efficient market.” Daman would consider buying project bonds, he said.
The yield on Taqa’s 4.75 per cent bonds due in September 2014 tumbled 126 basis points this year to a record low of 1.84 per cent on August 23 before climbing to 1.87 per cent yesterday, data compiled by Bloomberg show. Abu Dhabi’s 6.75 per cent notes maturing in April 2019 yielded 2.31 per cent on Tuesday, a drop of 98 basis points in 2012.
Taqa and its partners had obtained $2.7 billion in funding for Shuweihat in October 2009 at a margin of between 2.35 per cent to 3.5 per cent above the three-month London Interbank Offered Rate, according to data in Taqa’s annual report. Based on Tuesday’s three-month Libor of 0.42 per cent, negotiating loans at a similar margin this year would cost as much as 3.92 per cent. In October 2009, Libor was 0.28 per cent.
Safer debt
Still, project bond sales are in their infancy in the region, partly because they are riskier than government debt. Banks generally have recourse only to the project and its cashflow rather than to assets held by the project’s owners in case of a default.
State borrowers have also found it cheaper to take out bank loans or issue debt backed by the government than to sell securities linked to infrastructure that in some cases hasn’t been built yet, National Commercial’s Kotilaine said. Qatar Petroleum opted to raise more than $7 billion through a syndicated loan for its Barzan gas project last year.
Risk hungry
The drop in corporate and sovereign borrowing costs this year is likely to act as a catalyst for more project bond sales, especially as syndicated lending declines amid the European debt crisis. Syndicated loans in the Middle East and North Africa tumbled 22 per cent to $18 billion, data compiled by Bloomberg show.
Societe Generale SA, which helped manage the Dolphin issue, said in May it was working on at least two deals in the UAE that include a project bond component.
The average yield on UAE debt tumbled 151 basis points this year to 3.95 per cent on August 27, the HSBC/Nasdaq Dubai UAE Conventional US Dollar Bond Index shows. As Gulf government debt yields retreat, “project bonds will appeal to an investor base that’s risk hungry,” Janab of Daman Investments said.
