Regional bankers are predicting a long, slow summer for bond issues as debt market liquidity in GCC currencies starts to dry up.
Over the past six months, a rise in the cost of dollar funding has been partially offset by companies tapping into the abundant local currency liquidity, particularly debt priced in UAE dirhams.
However, bankers now tell MEED of an increasing reluctance among lenders to finance deals in dirhams, while pricing in the dollar market has yet to stabilise.
“It looks like we could be in no-man’s land for the next three months,” says the Bahrain-based head of syndications at one major bank. “If you look at the recent local currency liquidity, it is really only coming from a handful of lenders, and the amount of money that can come from them in dirhams is limited.”
Commenting on the slowdown in activity, another local banker speculates that deal flow in July will be even lower than usual.
On a recent $5.5bn syndicated loan for Dubai World, banks were invited to finance the deal in either dirhams or dollars, but only $1.2bn in dirhams was forthcoming from the banks.
“The dirham market seems to be pausing after very rapidly developing and lending a lot of money,” says one Dubai-based head of capital markets. “I expect there is room for one or two more deals to get through before the market slows down for summer.”
Other recent issuers have moved into currencies that are unusual for the region, including the $238m deal for Dubai Holdings denominated in Swiss francs and completed in mid-June.
Traditionally, the financial markets slow down in July and August as senior executives and officials escape the region’s sweltering summer months. This will be followed by Ramadan at the beginning of September, which could further hold up decision-making on any new deals.
However, bankers fear that the level of activity this year could be even lower than normal. “The summer slowdown looks like it is starting early this year,” says the head of regional debt capital markets at one international bank.
As the markets pause to wait for deals arranged earlier in the year to be placed, bankers are hoping that spreads on dollar financing will have narrowed as business returns to more normal levels once Ramadan is over.
At the beginning of June, bankers had begun to predict that some dollar-denominated deals could occur after the summer (MEED 1:6:08).
“[However], there is still a disconnect between pricing levels in the dollar market and what borrowers actually want to pay,” says the Dubai-based banker.
In an effort to sidestep both the local currency and dollar funding issues, borrowers in the region could start looking at issuing samurai bonds – Japanese yen-denominated bonds that can be targeted at retail investors.
Local bankers say several GCC-based corporates are looking at the possibility of issuing samurai bond in the autumn as business picks up.