Abu Dhabi sovereign to return even as Gulf bonds are set to surge

Published December 25th, 2013 - 10:02 GMT
Infrastructure spending in the gulf has risen sharply in recent years. (Image credit: Shutterstock)
Infrastructure spending in the gulf has risen sharply in recent years. (Image credit: Shutterstock)

Bond issuance from the Gulf Arab region is set to surge next year on the back of heavy infrastructure spending and refinancing needs, while the Abu Dhabi sovereign may return to the market after an absence of nearly five years according to an article in the Saudi Gazette.

The region's issuance of conventional bonds and sukuk fell to $28.97 billion this year from $36.90 billion in 2012, according to IFR, a Thomson Reuters unit.

That was partly because of jitters about the US Federal Reserve's plans to cut its monetary stimulus, which widened bond spreads globally, and partly due to both Abu Dhabi and its government-related entities (GREs) staying away from the market.

Now the Fed has started cutting back and global markets are reacting calmly, however. Meanwhile, billions of dollars of Abu Dhabi-linked obligations are due in the next 12 months, and the emirate is expected to replace at least some with new paper.

"We think $40-45 billion could be possible next year as more non-government issuers come to the market and large sovereign refinancings boost the overall volumes," said Klaus Froehlich, head of investment banking for the Middle East and North Africa at Morgan Stanley.

The Abu Dhabi sovereign, which has $1.5 billion due to mature in April, has not issued debt publicly since its debut deal in 2009.

Factors behind its reluctance appear to include its substantial cash reserves, a long internal review of the borrowing practices of its GREs, and concern about fellow emirate Dubai piling up debt. These factors mean a new bond to replace the maturing obligation is not certain next year.

"There would be a lot of investor interest in Abu Dhabi sovereign paper," said Chavan Bhogaita, executive director for credit and alternative investments at National Bank of Abu Dhabi .

"But the argument that they don't need the money is quite powerful and I don't think their position in this regard has changed in the last 12 months."

Bankers have long promoted the benefits for local GREs and corporations of having a sovereign curve to price off, but large budget surpluses have made many Gulf governments reluctant to act upon this advice - only Qatar, Dubai and Bahrain are regular issuers.

However, this hasn't stopped Abu Dhabi GREs, which enjoy strong ratings due to their state links, from issuing in the past, and some are expected to tap the market again in 2014.

Abu Dhabi National Energy Co (TAQA) - with a $1 billion bond due in September - has already sent out an invitation to banks to pitch for a role on a 2014 debt issue, IFR reported this month.

Other Abu Dhabi GREs with obligations maturing next year include Mubadala Development Co, which has $1.25 billion due in May, and Tourism Development and Investment Co , which has $1 billion maturing in October.

One constraint on the debt market may be the ready availability of bank loans. Lenders in the United Arab Emirates are extremely liquid after a sustained period of low loan growth, with a loan-to-deposit ratio across the UAE banking system of just 92.8 percent in September compared to a November 2011 peak of 102 percent, according to central bank data.

Asset-hungry local banks are complemented by international lenders willing to lend cheaply in the hope of securing fee-paying future business.

This leads to cases such as International Petroleum Investment Co, which has been refinancing a $2 billion loan through about 12 banks. The facility is split evenly between three- and five-year tranches at 40 and 50 basis points over the London Interbank Offered Rate.

Such attractive terms in the loan market, even for five-year money, may remove the need to tap the bond market, said a UAE-based banker, speaking on condition of anonymity as he wasn't allowed to talk to media.

But the increasing sophistication of regional firms and their borrowing habits means more first-time bond issuers are expected from the Gulf in 2014, continuing the trend of the last couple of years.

In 2013, the market saw new banks - Al Hilal Bank and Al Khaliji Commercial Bank - as well as corporates such as Batelco, GEMS Education and Topaz Marine issue debut deals, with the latter two showing other growing firms that successful financings can be completed in the bond market.


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