Dubai: Issuance of both conventional and Islamic (sukuk) bonds are expected to remain steady this year with sukuk gaining a larger share in the total capital market issuance in the region, according to rating agency Standard & Poor’s.

In 2003, total debt capital market issuance was close to $55 billion which was nearly 8 per cent higher compared to the previous year with most of the increase coming from sukuk issuance.

In 2014, analysts expect the total issuance to remain steady at around $58 billion, while sukuk dominating the regional capital market issuances.

Corporate and infrastructure issuers in the Gulf continue to benefit from positive economic fundamentals and strong appetite from regional and international investors for high credit quality paper.

“We believe corporate entities will remain innovative in their funding solutions, as UAE real estate company Majid Al Futtaim Holding’s issuance of perpetual hybrid securities last year shows,” said Standard & Poor’s credit analyst Karim Nassif.

The strong appetite for infrastructure issuance is demonstrated by the UAE-based Ruwais Power Co’s (Shuweihat 2) $850 million project financing and the Sadara Chemical Company’s 7.5 billion Saudi riyal (about $2 billion) sukuk issue.


Investor demand

“Strong investor demand has allowed issuers to tap markets at record low coupon rates and extend debt maturity profiles. This has helped improve their financial credit profiles,” said Tommy Trask, credit analyst with Standard & Poor’s.

Utility companies such as power and water companies are expected to tap the market this year along with transport sector entities such as airport developers and rail and road developers.

“While government-related entities [GREs] looking at diversifying their funding sources will be a major component of issuers on the market, we expect medium-size corporates to be the big game changers in the volume of issuance,” said Stuart Anderson, Managing Director & Regional Head Middle East of S&P.

A number of these companies that have new generation chief financial officers (CFOs) are favouring longer term unsecured funding sources to bank financing whose availability is largely a function of liquidity in the market.

Low interest rates, positive economic scenario, growing demand for Islamic asset classes, and the continued need for infrastructure investment in the GCC region are expected to fuel sukuk growth.

Analysts also expect the overall regulatory environment in the region and Basel III capital adequacy requirements for banks are likely to restrict their capability to provide longer-term funding to corporates.

The UAE has introduced caps on the market exposures of GREs. Given the tightened caps, banks’ appetite for new lending to governments and GREs is likely to drop.

“We expect banks to encourage borrowers that are rated, or could potentially be rated, ‘AA-’ or higher to issue bonds and sukuk rather than seek traditional loans,” said Trask.