GCC financial sector bond issuances set to reach $13bn by 2018

09 May 2013

Bonds are currently trading at tight pricings, the result of quantitative easing

Up to $13bn in Tier-1 and 2 financial sector bonds could be issued in the GCC over the next five years if banks optimise hybrid capital structures, which combine aspects of both debt and equity, according to Arqaam Capital, a Dubai-based emerging markets investment bank.

Bonds are currently trading at tight pricings, a reflection of quantitative easing by the US Federal Reserve, the Bank of Japan and Bank of England.

At the end of April, Qatar National Bank raised $1bn in a single day deal, according to Jaap Meijer, Director of Equity Research at Arqaam Capital. “Its tight pricing meant that the seven-year bonds traded in a 10 cent range above the re-offer levels throughout the following week. “We expect spreads to remain tight for the foreseeable future, though it is difficult to expect even further tightening,” he said.

Banks in the UAE are increasingly choosing bond issuances as a way to diversify their funding mix.

Last week, Commercial Bank of Dubai announced plans to issue its first dollar-denominated bond issuance. It mandated Citigroup, HSBC Bank and National Bank of Abu Dhabi to conduct a series of investor meetings in Asia, the Middle East and Europe, after which it may launch a bond of at least $500m.

Middle East credit markets are currently focused on new issuances and the long end of the credit curve [a set of securities maturing in several years’ time], said Dilawer Farazi, bond portfolio manager at Abu Dhabi-based financial services company InvestAD.

“Long-end perpetual bonds [with no maturity date] have stabilised and have been trading in a very narrow price range this week as investors remain active at the short end of the curve after the recent volatility in US treasuries,” he said.

Arqaam’s Meijer added that some banks in the Mena region, such as Doha Bank, Commercial Bank of Qatar, Abu Dhabi Islamic Bank and Bank of Beirut, are paying dividends that are too high relative to their future capital needs in order to appeal to retail and high yield investors.

To cope with that, “banks will need to strengthen capital through fresh equity or reduce pay-outs”.

So far, over $5bn of dollar-denominated bonds have been issued this year in the GCC.

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