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Gulf issuers see demand underpinning bond mania

Gulf has $60 bln-plus refinancing needs in 2011.

November 4, 2010 4:36 by



Pent-up demand for regional debt and ample liquidity will lessen the risk of a bubble developing in Gulf Arab region bond issuance, after a speedy pick-up in recent months that shows little signs of slowing, analysts said.

In what one regional trader dubbed “new issue mania” (NIM), Gulf issuers sold about $6 billion in debt in September and October, including a $1.25 billion sovereign issue from Dubai.

At least five potential issuers are on global roadshows this week, from Abu Dhabi’s International Petroleum Investment Co (IPIC) to banks and even sub-investment grade corporates, virtually unheard of so far this year.

“The bond issues that have come to market recently cover a broad spectrum in terms of credit quality, geography, industry sector, etc, hence investors are getting a decent choice from which to cherry-pick their opportunities,” Chavan Bhogaita, head of credit research at National Bank of Abu Dhabi (NBAD), said.

There was a lack of bond issuance in the Gulf in the first nine months of the year as the global credit crisis and debt troubles at Dubai state conglomerate Dubai World sunk investor confidence.

However, improving market conditions and September’s agreement on Dubai World’s restructuring of some $25 billion debt has allowed local issuers to take advantage of low interest rates in the U.S. and high demand for paper from the region.

The Gulf has more than $60 billion refinancing needs in 2011 according to some estimates, and issuers that may have otherwise waited have jumped on the demand-led bandwagon. Volume this year is still lower than the $35 billion issuance in 2009.

SECONDARY FACTORS

But the concentrated timespan in which issuers are looking to sell debt has raised concerns of a secondary market sell-off.

Investors say this risk is mitigated by strong demand for regional debt and the timing: with this month’s extended Eid religious holiday and end of year book-closing on the horizon, markets will be able to take a breather.

“As long as there is sufficient real demand for new issues then there is little risk of a sell-off,” John Bates, head of fixed-income at London-based asset manager Silk Invest, said.

“For the Middle East it is likely the success of new issues will become more price-related. As long as investors are paid properly for the risk they are taking and markets readjust to a more fundamentally driven market, the risk of a widespread sell-off or bubble can be avoided.”

Many recent issues have been substantially oversubscribed and that demand has allowed issuers to offer lower yields.

Last week, Abu Dhabi Islamic Bank  issued a $750 million sukuk (Islamic bond) — which was nearly five times oversubscribed. . Qatar Telecommunications Co  launched a $1.5 billion bond in October which got $15 billion in orders.

“I don’t think we’re seeing investor fatigue or oversupply,” Thomas Christie, an institutional sales trader at Wallich & Mathes, said.

“Investor fatigue is certainly something issuers are fearful of but that hasn’t stopped them tightening pricing indications and final pricing as demand increases.”

(Reporting by Rachna Uppal; Editing by David Hulmes)



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