18 February 2015

For the first time since 2009, the number of Gulf corporate bond sales this year is zero. Banks have been the only issuers of bonds in the six-nation Gulf Cooperation Council so far in 2015, with all but one from lenders based in the United Arab Emirates, according to data compiled by Bloomberg. Total sales are down about 7.8 per cent from this point last year, and more than 60 per cent from the 2012 record, the data show.

Companies have contributed to the slump in issuance as they opt for loans from local banks flush with cash and after a decline in crude prices threatened economic growth in the GCC, which is home to about a third of the world’s proven oil reserves. With a limited supply of new notes, investors have poured cash into the secondary market, driving yields in the region to near record lows.

Corporates “are getting cheap funding from the banks,” Doug Bitcon, a Dubai-based fund manager at Rasmala Investment Bank Ltd., said by phone on Tuesday. “Banks recognize that down the line there’s going to be lower levels of liquidity available and they want to be ahead of the curve in terms of funding.”

No Upside
First Gulf Bank, the UAE’s third-biggest bank by assets, raised $750 million from the sale of five-year dollar notes yesterday, according to two people familiar with the deal, who asked not to be identified because the information is private.
“The banking sector is raising bonds and lending to the companies,” Montasser Khelifi, a Dubai-based senior manager at Quantum Investment Bank Ltd., said by phone on Tuesday. “Now it’s difficult to find some sukuk or bonds that have significant upside because they’ve been trading for a long time. It’s always good to have a dynamic primary market.”

The average yield on bonds sold by Middle East issuers was at 4.597 per cent on 13 February, just off a record low of 4.566 per cent on 29 August, according to JPMorgan Chase & Co. indexes.
The UAE’s two biggest banks, National Bank of Abu Dhabi and Emirates NBD, are among issuers so far this year. About $3.2 billion of notes were sold through Tuesday. Last year, companies including Saudi Electricity Co. and Kuwait Projects Co. were among borrowers that raised about $3.5 billion in the same period.

“In 2014, some of the issuers that had previously tapped the debt capital markets were refinancing via syndicated facilities or bilateral facilities,” Bitcon said. “Maybe if we see less liquidity in the banking sector, then we might see more issuance by the corporates.”
Standard & Poor’s said this week that deposit growth in some UAE banks would be “noticeably weaker” in the next two years due to a drop in government and public sector deposits after oil prices declined.

‘Still Hungry’
Brent crude has declined 43 per cent in 12 months to $61.90 a barrel. Governments in the region rely on income from crude to help fund their budgets.
UAE banks’ ratio of loans to deposits, a measure of liquidity, improved to 98.2 per cent in December from 99.7 per cent a year earlier, according to central bank data. In neighbouring Saudi Arabia, the biggest Arab economy, the ratio improved to 86 per cent in December from 86.8 per cent a year earlier, according to data from the country’s regulator.
Investors are left waiting for more diverse issuance, Quantum’s Khelifi said. ‘‘We’re still hungry for diversification and names from other sectors,” he said. “There’s money to be invested.”