Gulf Bond Market Braces For Deals After Fed Decision

The Gulf’s bond market is set to emerge from five months of near-inactivity after last week’s decision by the U.S. Federal Reserve to maintain its monetary stimulus created a window for banks and corporations to raise cash.

A total of $16.6 billion was raised on global bond markets last Thursday, a four-fold rise from the day before. The Gulf market’s reaction to the Fed will not be as dramatic, partly because – thanks to strong economic growth – most potential issuers in the region are liquid and do not need money urgently.

Nevertheless, within hours of the Fed’s announcement two prospective Gulf issuers announced plans for investor roadshows, a sign they feel enough stability has returned to the market for deals to move ahead.

“After what the Fed said last week, it will give respite to the market and you should expect to see borrowers coming back and raising money in the coming weeks,” said Sebastien Henin, portfolio manager at The National Investor.

“We should have a very strong finish to the year.”

Selling in the Gulf’s secondary market for bonds over the last few months has created a good entry point into a market which is backed by healthy local economies and strong bidding by local investors, said Mohieddine Kronfol, chief investment officer for global sukuk and regional fixed income at Franklin Templeton.

SABIC, AL HILAL

The companies which have announced roadshows, Saudi Basic Industries Corp and Abu Dhabi’s Al Hilal Bank, are expected to attract a lot of interest among investors for particular reasons.

Al Hilal, which began marketing its debut offer on Sunday, benefits from its 100 per cent government ownership and its choice of a sukuk structure, since appetite for Islamic bonds among cash-rich Gulf investors still appears to outweigh supply.

SABIC’s conventional bond will offer rare U.S. dollar exposure to Saudi Arabia, should it print later this week.

“Every time we see a new issue out of Saudi, we get a bit excited, as if the prospect of that market’s development has just taken one step forward,” said Kronfol.

Other potential candidates for deals before the end of the year include Qatar’s Al Khaliji Commercial Bank, Emirates Aluminium (Emal), and Dubai Investments, according to bankers.

Meanwhile, much speculation has centred on whether Abu Dhabi state-linked entities could return to the debt market after a long absence – the maturity in May 2014 of a $1.25 billion bond previously issued by state-owned fund Mubadala has bankers hoping the conglomerate could print in coming months.

The Gulf’s issuance calendar is complicated by the approach of Eid Al Adha, which is expected to effectively close the market for a week-long holiday period starting in mid-October.

The timing of Eid will reduce Gulf issuers’ room for maneouvre ahead of the U.S. Federal reserve’s next policy meeting at the end of October; James Bullard, president of the St. Louis Federal Reserve, told Bloomberg Television last week that the Fed might still scale back its stimulus at the October meeting.

“At the moment, the market is pricing in tapering to start from December onwards. Nevertheless, the decision will be data- driven, hence we can see some volatility in the market. Already, Bullard’s remarks on timing triggered some pressure following the initial rally,” said Ali Soner Guney, fixed income fund manager at National Bank of Abu Dhabi.

The result may be that a few Gulf issuers who are already fully prepared to go to market – perhaps only SABIC and Al Hilal – issue before mid-October, while the rest are forced to wait until after next month’s Fed meeting.

“Everyone knows that rates are on their way up so this is just a temporary reprieve. What I’m telling my clients is they should come now if they can,” said a Gulf-based debt capital markets banker.

EXOTIC STRUCTURES

The window created by last week’s Fed meeting may not be large enough for the more exotic structures that were issued in the Gulf earlier this year, such as Tier 1 and 2 capital-boosting bonds, given the widening of spreads which has taken place since some of them were sold.

Emirates NBD’s Tier 1 perpetual bond , priced in May with a coupon of 5.75 per cent, has widened since then to trade at a yield of 6.30 per cent bid.

So names such as Dubai’s Majid Al Futtaim, Commercial Bank of Qatar and Ahli United Bank, which bankers believe were all considering hybrid bond transactions earlier this year, are unlikely to be part of any rush to issue.

“All these guys would have got board approvals for pricing at a certain level and these are now a long way away,” said the Gulf-based DCM banker.

Majid Al Futtaim was looking to raise money to support its buyout of Carrefour’s stake in a joint venture. But the mall operator raised additional funds when it was refinancing a $1 billion loan facility this month, giving it extra resources should it require them, so it may have no further need to issue bonds. MAF declined to comment.