NCB Capital, the largest investment bank in Saudi Arabia and a subsidiary of National Commercial Bank, reported that the GCC conventional bond market recorded a poor performance in the first quarter of 2010 amid Dubai-linked and broader sovereign debt fears. Primary issuance fell by some 70% in value from the average of the previous three quarters to US$3.4 billion and the GCC sukuk market stalled even more sharply in marked contrast to global trends.
Dr Jarmo Kotilaine, Chief Economist of NCB Capital, said, “The growing optimism that characterized the GCC debt markets during much of 2009 seems to have largely evaporated during the first quarter. Activity was subdued as new bond issuances contracted sharply from levels seen during the preceding three quarters.”
Sentiment was shaken by high-profile events such the disputes associated with the USD100m TID Global Sukuk issued by Kuwait’s Investment Dar and the Dubai World debt moratorium.
Both cases heightened market uncertainty and raised broader concern about sukuk structures and the lack of widely accepted mechanisms for dealing with default-type situations.
Further anxiety was caused by rising sovereign risk worries in Europe, which spilled over into the conventional bond markets. The widening spread prompted issuers to shy away from the market. This reversal in market sentiment was especially sharp in the case of sukuk.
The lackluster quarter for sukuk in the GCC stands in sharp contrast to developments elsewhere in the world. Total global sukuk issuance rose by 114% to US$4.7bn in the first quarter, primarily led by robust market revivals in Malaysia and Indonesia.
Uncertainty is likely to persist for the GCC debt capital markets in the near term as Dubai World seeks creditor approval for its USD26bn debt restructuring, however the bank sees an encouraging outlook in the medium to long-term.
Dr Kotilaine said, “The GCC debt market holds significant potential given the long-term financing needs for the region and the size of the current pipeline. However, structural risks such as ambiguous insolvency provisions and lack of clarity among sukuk structures will necessitate greater attention than they have received to date.”