Abu Dhabi: Gulf bond sales are set for a record first half as lower borrowing costs enable companies in the region to refinance debt and raise money for expansion.
Governments and businesses in the six-nation Gulf Cooperation Council have sold $18.2 billion (Dh66.8 billion) in bonds this year, 76 per cent more than in the same period in 2011, data compiled by Bloomberg show. That’s the most for the first half since Bloomberg started tracking the data in 1999.
GCC sales expanded almost four times faster than those in emerging markets, which are up 20 per cent in 2012, the data show.
“The GCC bond market has been very resilient in 2012,” Anas Al Maizi, an Abu Dhabi-based fund manager at Royal Capital PJSC, said last Monday.
“Issuers are trying to profit from the current low yield environment to refinance their debt.”
Average yields on GCC bonds have fallen almost two times more than those in developing countries in 2012 as companies in Dubai paid and restructured debt.
Issuers in Saudi Arabia, Qatar and the UAE have also raised funds to help finance projects as the GCC benefited from an increase in oil prices to an average $101 a barrel this year from $80 a barrel in 2010.
The average yield on GCC debt has dropped 53 basis points this year to 4.55 per cent last Tuesday, the HSBC/Nasdaq Dubai GCC Conventional Average Yield shows.
The region’s biggest sale of the year was the 15 billion riyals (Dh14.7 billion) of Islamic bonds issued by Saudi Arabia’s General Authority of Civil Aviation, which plans to use the funds to pay for an airport in the Red Sea port city of Jeddah.
Saudi Arabia’s government is investing more than $500 billion to develop industry, infrastructure and create jobs.
That coincides with government plans to spend about $100 billion in Qatar, according to International Monetary Fund estimates, as the world’s biggest exporter of liquefied natural gas prepares to host the 2022 football World Cup.
Abu Dhabi, which sits on 7 per cent of the world’s proven oil reserves, also said this year it would resume stalled projects including branches of the Guggenheim and Louvre museums.
GCC bond sales are “a result of the solidity of the economic environment”, Mark Watts, head of fixed-income at National Bank of Abu Dhabi PJSC’s asset management group, which manages Dh4.1 billion, said last Tuesday.
The “amount of expansion projects and infrastructure plays in the region, the steady maturing of the institutional investment sector and the increased ability of buy-side firms to manage those institutional assets” helped prop up issuances, he added.
Economic growth in the region may slow to 5.3 per cent this year from 8 per cent in 2011, according to IMF forecasts. That’s still above estimated growth of 3.4 per cent in Latin America and compares with a contraction of 0.4 per cent in the Eurozone, according to forecasts compiled by Bloomberg.
While bond sales are up, they’re coming from a “very low base” relative to other emerging markets, Ahmad Al Anani, Middle East director at Exotix Ltd, said last Tuesday. “There’s been a lot of demand for issuance in the region driven by interest from local investors rather than international.”
GCC sales compare with $459 billion in emerging markets so far this year and $68 billion in Latin America. “We’re still far away from the potential for the region,” said Al Anani. “I wouldn’t say the market is maturing until I start seeing some of the non-government related entities issuing.”
Regional sales have been supported by a decline in borrowing costs in Dubai.
A number of state-linked companies in Dubai have repaid and restructured debt this year, among them Dubai Holding, which repaid a $500 million bond that matured in February.
The Dubai Electricity and Water Authority (ewa) paid Dh1.2 billion in borrowings on March 15, about eight months early, while Dubai International Capital reached a $2.5 billion restructuring agreement in April.
“Dubai has managed to kind of clean house and to some extent restructure a lot of its obligations,” Al Anani said.
“I think that goes some way in renewing confidence and igniting interest in the regional fixed-income market.”
The cost of insuring Dubai’s debt against default for five years has dropped 51 basis points this year to 394 on June 5, according to data provider CMA.
That compares with a 6 basis-point decline to 236 in average GCC credit default swaps, according to CMA, which is owned by CME Group and compiles data from the privately negotiated market. The contracts pay the buyer face value if a borrower fails to meet its obligations.
The GCC’s bond pipeline is growing. National Bank of Abu Dhabi expects to manage two UAE bond sales before summer, Fawaz Abu Sneineh, head of debt capital markets at National Bank of Abu Dhabi, said on May 14.
Royal Bank of Scotland has five to ten mandates for GCC bond and sukuk sales, Jacco Keijzer, head of debt capital markets, said on April 30.
“A lot of the cash or the dry powder that’s been on the sidelines in the region over the last two years is now being deployed again,” Al Anani said.