Debt rebalancing to boost MENA bond market

Debt rebalancing to boost MENA bond market

Shift from loans to debt market helps support bond pipeline; MENA M&A activity down 48 pct in 2011; Equity markets remain nervous, IPOs in high single-digits in 2012

January 15, 2012 5:30 by Reuters

Debt capital markets activity in the Middle East North Africa region should exceed last year’s total amount as firms rebalance their borrowing away from loans towards the bond market, Morgan Stanley executives said on Sunday.

Loan volumes in MENA slumped significantly in 2011, down 36.8 percent to $39 billion, and much has been made of the withdrawal of European banks from the Middle Eastern loan market and the impact this will have on volumes going forward.

However, a rebalancing from loans to bonds is also underway, according to Klaus Froehlich, head of MENA capital markets at Morgan Stanley.

“There is also quite a bit of migration from the bank loan side which should help improve capital markets debt volumes,” Froehlich told reporters at an event in Dubai.

“The majority of issuance will continue to be conventional, even though we are seeing strong appetite for Islamic issuance,” he added.
Froehlich said issuance should exceed the $27 billion which was printed in 2010, with recent successful offerings pointing to pent-up demand in the DCM space.

The bank was more optimistic about M&A activity in 2012 after a year which saw volumes plummet by 48 percent.

“There has been a marked shift towards cash-only offers,” Peter Fort, head of MENA M&A for the US investment bank, said at the same event.

“The real drop in volumes has been in the outbound M&A market. The outlook for 2012 is better.”

Economic activity in the MENA region was hit in 2011 by heightened political risk as a result of the Arab Spring, and while many expected Middle Eastern cash to help bolster indebted European entities, there have been few completed deals.

Etihad Airways’ stake purchase in Air Berlin and the acquisition of Dexia’s private banking arm by an investment group owned by Qatar’s royal family are two rare examples.

“M&A activity in the (MENA) region will continue to be driven by sovereign wealth funds but they will be disciplined,” Fort said.
Several high-profile investments made by Middle Eastern SWFs at the top of the market, such as the Kuwait Investment Authority’s in Citigroup, resulted in heavy losses when the financial crisis hit.

Nervous investors will also ensure equity markets remain quiet in 2012, although a potential new companies law in the United Arab Emirates and the mooted opening up of the Saudi market to foreign investors could be triggers for heightened activity in the region.
“Investors are putting a lot of emphasis on the ability to enter and exit markets efficiently and that has affected equity market activity given low liquidity levels,” Froehlich said.

“However, some high quality issuers are preparing for IPOs and you will see activity picking up this year. I expect a high single digit number of internationally-marketed equity capital market transactions, larger than $250 million, for 2012 out of MENA,” he added. (By Dinesh Nair; Writing by David French; Editing by Reed Stevenson)