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The problem with sovereign spreads and corporate reform

The problem with sovereign spreads and corporate reform

This year, Bahrain, Qatar and Dubai issued sovereign bonds, and all paid hefty premiums demanded by investors because of the turmoil in global financial markets. Even AA-rated Qatar paid a new-issue premium of about 40 basis points on the five-year tranche of its $5 billion mega bond in November.

December 28, 2011 2:05 by

Gulf Arab governments may be pressured into increasing sovereign borrowing next year to raise funds on behalf of state-linked companies, as wide credit spreads make raising corporate debt expensive.

Corporations have faced even more scepticism from investors, so the vast majority of the Gulf’s non-sovereign bond issuance this year has been by banks or top-rated government-related entities (GREs), with many other potential borrowers forced to delay issuance plans until pricing improves.

Middle East issuance of international bonds totals about $29 billion this year, according to a preliminary estimate by Thomson Reuters, compared to issuance of about $32 billion last year in the Gulf Cooperation Council alone. At the beginning of this year, analysts had expected 2011 volumes to be much higher.

Most major corporations in the Gulf are government-owned or connected to the state in some way — for example, through large stakes held by sovereign wealth funds or ruling families. So if market conditions remain tough, governments will be tempted to increase their sovereign issuance and then funnel some of the money raised to companies via cheap loans or other channels.

“The challenging macro environment globally has driven costs of funding significantly higher, and this is likely to raise the question of whether governments in this region should consider borrowing centrally on behalf of the GREs,” said Chavan Bhogaita, head of the markets strategy unit at National Bank of Abu Dhabi.

At the same time, the need for companies to issue bonds may soon become pressing. The region faces massive corporate refinancing needs next year, at over $50 billion according to some estimates. Tapping the bond market has become more important as the euro zone debt crisis has caused the international syndicated loan market to freeze up for all but the top credits.

Saudi Arabia may already be moving towards issuing debt in order to reduce the funding burden on companies. The Saudi Arabian Monetary Agency is talking with local and international banks with operations in the kingdom about issuing a riyal-denominated sukuk as early as in the first quarter of 2012, banking sources told Reuters this month. It is expected to be the country’s first substantial issue of government debt for several years.


Bond price movements in recent months show how attractive a strategy of central financing for corporations might be. The yield on AA-rated Abu Dhabi’s $1.5 billion, 6.75 percent sovereign bond due 2019 was at 3.25 percent on Wednesday, having dropped about 75 bps since early October, when the euro zone crisis took a turn for the worse.

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