Saudi, other issuers gear up as Gulf bond crush looms

Bond issuers in the Gulf will have to make potentially costly decisions on timing in coming weeks as the cash-strapped region gears up for one of its heaviest-ever periods of international issuance – possibly over $25bn by the end of October.

Saudi Arabia, its finances strained by low oil prices, is expected to make its market debut in September. Bankers in touch with Saudi officials say it may come close to Argentina’s $16.5bn issue in April, the largest emerging market debt sale.

Bahrain has also chosen banks for an issue, while Kuwait has said it may sell up to $10bn of conventional bonds and sukuk in global markets during the fiscal year to next March. Officials have indicated this could happen as soon as September.

Add to that a half-dozen major companies in the six-nation Gulf Cooperation Council (GCC) looking at issuing bonds, including Abu Dhabi’s Union National Bank and Abu Dhabi National Energy Co, and there is the risk of a temporary supply glut that could push yields higher or even force some issuers to delay their plans.

Sergey Dergachev, senior money manager at Union Investment Privatfonds, a Frankfurt-based emerging markets debt investor, said the most important factor could be the Saudi issue’s size.

“If they issue a huge amount it will lead to some repricing in spreads among GCC credits and will make life for other GCC sovereigns and corporates in issuing debt a little bit trickier, as the market needs to absorb a large issue size.”

The potential scale of the Saudi sale saddles other issuers with tough choices. If they wait until after Riyadh issues, market demand for GCC debt may be temporarily reduced – but if they move ahead of Riyadh, they may find potential buyers holding back cash in anticipation of the Saudi bond.

The risks of waiting may be increased by the Eid al-Adha holidays around Sept. 9-17, when business traditionally slackens and an issue may be trickier to do, and by the U.S. Federal Reserve policy meeting on Sept. 20-21, which could produce a U.S. interest rate hike.

OIL

Since oil prices began sliding in mid-2014, GCC governments have mostly relied on running down financial reserves and issuing debt domestically to cover budget deficits.

That has begun to change in the last few months as reduced flows of petrodollars into GCC economies have tightened liquidity at banks and lifted interest rates. This is pushing both governments and firms to borrow abroad.

A record total of $26.3bn in international bond issuance came from the GCC in the second quarter, including $16.4bn from governments and state agencies, also a record, Thomson Reuters data shows.

With central banks around the world pursuing ultra-easy monetary policies and global investors desperate for yield, the market is still showing little concern about its ability to absorb another quarter or two of heavy GCC issuance.

The yield on state-controlled Saudi Electricity Co’s April 2023 dollar sukuk, one of the few outstanding international bonds from Saudi Arabia, dropped to a 15-month low of 3.04 per cent this week.

Its spread over the Polish government’s March 2023 dollar bond, also rated A2 by Moody’s, has widened only modestly to 82 basis points from 62 bps at end-March – much smaller than the record 140 bps hit in January, when market jitters over Riyadh’s ability to cope with cheap oil peaked.

Nevertheless, Saudi Arabia looks likely to pay a substantial premium to what Qatar paid when it sold $9bn of bonds in May, the GCC’s biggest issue so far. That is partly because Saudi Arabia is rated between one and four notches below Qatar by the three major credit rating agencies, and partly because of expectations for a lot more supply from Riyadh in coming years.

The pricing of Saudi Arabia’s issue will be “fairly generous”, said Federated Investors’ portfolio manager Mohammed Elmi, who invested in Qatar’s bond.

“Saudi Arabia is a black box. There are question marks over the National Transformation Plan’s implementation and delivery, and investors will want to see signs of commitment to reforming the economy,” he said, referring to a major Saudi reform plan designed to reduce the kingdom’s reliance on oil revenues.

Saudi Arabia may pay a premium of about 80-90 bps over Qatar, Dergachev estimated.

Looking further out, the GCC might face more serious funding squeezes in future years if oil prices do not rise, Bank of America Merrill Lynch analyst Jean-Michel Saliba said.

“So far, the market has been able to absorb the flurry of issuance given the supportive backdrop. It will be difficult to replicate this year-in, year-out.”