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Abu Dhabi leads in Gulf bond sales

Emirate plans to spend $500b to reduce dependence on energy resources

A view of Khalifa Street in Abu Dhabi
Image Credit: Ahmed Ramzan/Gulf News Archive
A view of Khalifa Street in Abu Dhabi. Companies in the emirate sold 65 per cent of the $9.5 billion (Dh34.89 billion) raised by the six Gulf Cooperation Council countries so far this year.
Gulf News

Abu Dhabi: Abu Dhabi, owner of 90 per cent of the United Arab Emirates' oil reserves, is beating Saudi Arabia and Qatar in selling bonds as it weans companies off government funding.

Companies in the emirate sold 65 per cent of the $9.5 billion (Dh34.89 billion) raised by the six Gulf Cooperation Council countries so far this year, compared with three per cent in Saudi Arabia and none in Qatar. In 2010, Qatar and Saudi Arabia, the largest Arab economy, sold 27 per cent and 21 per cent of the total compared with Abu Dhabi's 20 per cent.

Abu Dhabi is planning to spend $500 billion by 2030 to reduce its dependence on energy resources and build up industries from transportation to real estate.

Abu Dhabi needs a functioning debt market at a time when growth in bank lending has slowed to 2.2 per cent in the first four months of 2011 from more than 30 per cent annually between 2005 and 2008, according to data on the central bank's website.

"We will likely see continued Abu Dhabi bond issues this year as the government has instructed its myriad sovereign wealth funds and quasi-sovereign companies to become more independent over the next four to five years," said Emad Mostaque, a Middle East and North Africa strategist at Religare Capital Markets.

"Significant transfer payments will still be made into these entities, but the feeling is that they are now mature enough to operate more on their own."

The cost of insuring against a default by Abu Dhabi through credit default swaps is the second cheapest in the Middle East and Africa at 96 basis points, or 0.96 percentage point, after Saudi Arabia, the world's biggest oil producer.

For Brazil, Latin America's biggest economy, five-year credit default swaps cost 115 basis points, according to data provider CMA, which is owned by CME Group and compiles prices quoted by dealers in the privately negotiated market.

Face value

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Five borrowers from Abu Dhabi have raised $6.2 billion through seven issues so far this year compared with $750 million raised from one sale during the same period a year ago, according to data compiled by Bloomberg.

Companies and governments in the GCC have sold $9.5 billion worth of bonds, up from $7.6 billion a year ago.

Abu Dhabi, home to more than seven per cent of the world's proven crude reserves, is seeking to invest in industries including real estate and aerospace.

The emirate has the world's biggest sovereign wealth fund with more than $300 billion of assets under management, according to the International Monetary Fund.

International Petroleum Investment, an Abu Dhabi government-backed investor, is the biggest issuer of bonds in the Gulf so far this year, according to data compiled by Bloomberg. The company raised $4.36 billion in March by issuing €1.25 billion ($1.8 billion) of five-year securities and the same amount of 10-year notes, the data show. It also raised £550 million ($897 million) from a sale of 15-year bonds.

Dolphin Energy, the Abu Dhabi government-controlled venture transporting natural gas, may raise up to $1.93 billion from bond sales, a person familiar with the transaction said.

This year's 8.2 per cent increase in oil prices is underpinning investors' confidence in the emirate's ability to repay debt even as unrest sweeps the Arab world. The UAE was the fourth-largest producer in the Organisation of Petroleum Exporting Countries last month, pumping 2.55 million barrels of crude a day, according to a Bloomberg survey.


The emirate last sold bonds in April 2009, when it raised $3 billion from five-year and 10-year securities. The yield on the notes maturing in April 2014 gained six basis points to 1.80 per cent yesterday, according to Bloomberg composite prices.

The yield on Abu Dhabi's 6.75 per cent bond maturing in April 2019 rose five basis points to 3.84 per cent yesterday, according to prices on Bloomberg. The rate tumbled 95 basis points since its 2011 high of 4.79 per cent on February 28.

Mubadala Development, which sold $1.5 billion of bonds in April, may also return to the market this year.

The government-owned investor with stakes in Carlyle Group and General Electric, may sell debt to finance projects, Ali Najafbagy, head of capital markets at the company said in May. The timing depends on progress of construction, he said.

Tourism Development and Investment, a government-backed developer of hotels and museums, may sell bonds maturing in seven to 10 years, finance director Wallace Long said in April. The company has the ability to sell $3 billion of debt and may come to market in the next nine months, he said.

Recovering growth

The emirate's debt is rated Aa2 by Moody's Investors Service and AA by Standard & Poor's, the third-highest rankings. Abu Dhabi's economic growth may slow to 3.6 per cent, the Washington-based International Monetary Fund said in a report in May.

The economy grew about five per cent last year when the government boosted spending to reverse a 3.6 per cent contraction in 2009.

"The economy is already recovering," said Marios Maratheftis, Standard Chartered's head of research for the Middle East. "The UAE economy as a whole is already growing so there is less of a need to keep the stimulus in place."

Taking advantage of bond yields

Abu Dhabi: Issuers are taking advantage of the cheapest bond yields in the Arabian Gulf in more than six months as equity indexes decline and banks remain reluctant to lend.

Average yields fell to the lowest level since November 11 on June 2, before gaining three basis points to 4.9 per cent on June 14, according to the HSBC/Nasdaq Dubai GCC Conventional US Dollar Bond Index shows.

Abu Dhabi's benchmark share index dropped 0.9 per cent last year and Dubai's 9.6 per cent. Dubai is the second-largest borrower this year.

"Globally, there's a race to the bottom for emerging market sovereign and credit yields, and particularly in the UAE, and Abu Dhabi companies are taking advantage of this trend," said Gus Chehayeb, Dubai-based associate director at investment bank Exotix. "With yields so low and heavy investor appetite, it makes sense for Abu Dhabi government-related companies to tap the bond market rather than seeking funds from the government."

‘Pockets of debt'

Some Abu Dhabi companies are issuing more bonds than their Gulf neighbours because they have more debt due in the next two years compared with companies in other countries such as Kuwait and Saudi Arabia, according to John Bates, the head of fixed income at London-based Silk Invest. "There are pockets of debt in Abu Dhabi," said Bates. "A lot of the Saudi and Kuwait companies don't need the cash at the moment," he added.

Abu Dhabi's government may sell $1.5 billion (Dh5.5 billion) of bonds this year, its first international securities since April 2009, to establish a benchmark borrowing rate with a longer maturity, Standard Chartered said in a report on March 7.

Government officials met fixed-income investors in Beijing, Hong Kong and Singapore in March to update them on the emirate's economy, a government official said on March 9.


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