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Bonds dropped or shelved. Why do I care?

Bonds dropped or shelved. Why do I care?

Various high profile companies from across the region are cancelling or freezing plans to issue bonds. But why do you care?

March 10, 2011 4:15 by

Kipp has been struck by a pattern in the markets this last week or two. Here’s a few stories that will spell it out:

Emirates, the big company with all the fancy jets, has dropped plans for a bond. The company had mandated banks for a bond issue, according to reports, and it was expected to attract strong demand. “We tested the water and it was pretty muddy,” Tim Clark told Reuters in an interview on Wednesday at the ITB travel fair in Berlin. “So, we’ve parked it.”

Meanwhile, Arabtec, a big UAE construction company, has shelved plans to raise cash via a bond and rights issue. The company posted a profit last year, but it was down 38 percent year on year, while revenue was 29 percent down. Nonetheless as it announced the figures the company’s stock jumped, as it also revealed it would put the bond and rights issues on hold until “the market conditions become more favourable”.

And the National also reports that members of the Islamic Finance industry in the region are following a wait and see policy when it comes to new debt. The paper reports that Samad Sirohey, the chief executive of Citi Islamic Investment Bank, the Sharia-compliant arm of Citigroup, said while no companies had cancelled issuances of debt or equity, many seemed reluctant to come to the market in the current trading conditions. Those companies with maturing debt will resort to cash drawdowns, bank syndications and private placements to service their needs, apparently.

Why all this doubt about debt? Well it’s has to do with liquidity and risk. You see, the coupon on a bond (the interest you are paid on the money you paid for it) is set depending on various factors – interest rates, inflation, duration of bond, etc. But in the corporate world, the coupon also has to pay a premium to reflect the fact that the company may go bust and fail to make the payments or return your investment. The higher that premium, the harder it will be for company issuing the bond to keep up with payments.

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