Dubai Islamic Bank Sukuk May Open Window For Gulf Bond Issues

Gulf issuers of overseas bonds, kept on the sidelines by volatile markets, may revive their issue plans after Dubai Islamic Bank, the largest Islamic bank in the United Arab Emirates, completed a $1 billion sukuk issue.

The capital-boosting sukuk sale, with a perpetual tenor, was priced after generating $2 billion of demand nearly two months since the last deal was priced in the region.

Before the primary market froze up, a slew of companies had announced plans or mandated banks for possible bond issues including Bank Muscat, Gulf Finance House and UAE telecommunications giant Etisalat.

Sovereigns such as the Emirate of Sharjah and the Kingdom of Bahrain have also been looking into U.S. dollar conventional bond or sukuk issues.

Such plans were put on hold as oil prices collapsed and emerging markets saw capital outflows late last year.

The big Gulf states have huge fiscal reserves and are expected to be able to ride out an era of cheap oil fairly comfortably; Gulf bonds have actually performed well compared to emerging market counterparts in the last few months.

But the plunge of Gulf stock markets, which were overvalued and dominated by panicking retail investors, convinced bond issuers to stay out of the primary market.

“Volatile markets globally and the ripples in the regional equity markets soured sentiment in the Gulf bond markets, keeping issuers and investors at bay, despite strong liquidity and moderate rises in yield compared to global bonds,” a senior banker with a foreign institution said.

Before the primary market froze up, issuance in the region was fairly active; Middle East companies raised $46.08 billion via foreign currency bonds and sukuk in 2014 compared with $38.38 billion in the previous year.

PIPELINE

The success of DIB’s issue on Wednesday may now persuade issuers to return. The perpetual Tier 1 transaction was offered at 6.75 per cent, trimmed from initial price thoughts of seven per cent.

The healthy demand allowed DIB to sell the sukuk with almost no new issue premium, and the issue was trading flat in the secondary market on Thursday.

The deal priced well within some comparable debt; the perpetual bond of Kuwait’s Burgan Bank, which raised $500 million at 7.25 per cent in September 2014, is now trading at 7.15 per cent.

DIB’s earlier perpetual debt issue in March 2013, a $1 billion Tier 1 sukuk issue at a profit rate of 6.25 percent, was 14 times subscribed. However, that note was only Basel II-compliant, whereas the new sukuk will include loss absorption features at the point of non-viability, making it Basel III-compliant.

Assuming a 30-50 basis point pick-up to compensate for this factor, the Dubai lender appears to have left little on the table for investors.

Other factors may also encourage a revival of Gulf issuance. Although recent U.S. economic data may have pushed back the timing of a U.S. interest rate hike, issuers still see the possibility of one later this year, which would increase loan rates.

So some issuers may want to establish or maintain a presence in the bond market now, giving them another fund-raising option when the loan market eventually starts to tighten.

Some bankers think lower oil prices will make Gulf banks more cautious about lending, pushing companies toward bonds.

“I think banks will be less aggressive to lend so borrowers will have to look at public markets,” said Abdul Kadir Hussain, chief executive at Mashreq Capital, the investment unit of Dubai’s Mashreq bank, who oversees about $1.2 billion of assets.

“Benchmark rates are likely to stay low at least for the first half, so even if spreads widen a bit, a borrower could still get an attractive all-in funding cost.”

Some analysts also think that as Gulf governments’ oil revenues tumble, they will not rely entirely on their reserves to fund spending but will tap the bond market more, leading to both sovereign and quasi-sovereign issues. This may be particularly true of Bahrain and Oman, the financially weakest of the Gulf Cooperation Council states.

DUBAI

Dubai names may have an especially good window to issue after conglomerate Dubai World said this week that it had finalised a deal with a “substantial majority” of creditors to back its $14.6 billion debt restructuring.

Since the announcement early this week, the yield on the emirate’s dollar sukuk due May 2022 has dropped 15 basis points to 3.37 per cent, within six bps of the record low hit last June. The broader S&P MENA (Middle East and North Africa) bond and sukuk index has tightened five bps in the same period.

“The restructuring deal has removed uncertainty over the debt in the next few years, and the fact they are paying part of the debt early, even though it’s a small part, is a positive for Dubai credits,” a senior banker with a foreign bank said.

Dubai World had been in talks with lenders for months to secure a renegotiation of terms of the debt deal it signed in 2011, which followed a 2009 standstill request.