‘The boom in issuance can be explained from the perspectives of both demand and supply,’ says Hany Kamel of Banc of America Securities’ debt capital markets group. ‘On the supply side, the key is the asset/liability mismatch. There is a boom in investment opportunities in the region but the projects – in infrastructure and real estate, for example – are long-term. To date they have been financed from deposits, but rating agencies were beginning to warn that some longer-term funds were needed.
‘On the demand side, spreads in Europe have compressed significantly and there is little opportunity for yield. Consolidation has taken place in the European financial services sector and investors are seeking diversification so are willing to accept a lower yield on a new name.’
The flood of deals has been facilitated by the work of the pioneers – Emirates Bank International, Mashreqbank and Gulf Investment Corporation. Now the likes of National Bank of Abu Dhabi and Abu Dhabi Commercial Bank (ADCB) can decide to sign an EMTN programme one week and take it to market the next. The smooth passage of the deals is likely to become even more marked, as a large percentage of issuance in 2006 is expected to be repeat issuance by those with a programme already in place. ‘Volumes in 2006 could be anywhere from $5,000 million if conditions are bad – if there is increased appetite by borrowers for spreads or in the case of general market volatility – to $10,000 million under favourable conditions,’ says Kamel. ‘Probably about 80 per cent of that will come from repeat issuers.’
The practice of having a planned programme – in terms of size rather than timing – eases the process for those returning to the market. ‘Banks establish programmes partly because it’s simpler, for getting the necessary approvals – internally and from the regulator – and for getting a rating. It also hopefully means that the chief executive officer only needs to get involved in the decision to launch the overall programme, and after that the timing of issuance is simply a tactical decision. In addition, it sends a signal to the market that there will be repeat issuance, so it encourages investors to get to know the institution, whereas if they thought it was going to be a one-off, all the research would not be worth the time.’
A growing number of investors are considering this time well spent. The subscription base for GCC EMTNs is increasing in breadth. Initially concentrated in South-East Asia, the UK and Germany, it is now expanding to new areas such as India and Scandinavia.
‘Several trends are likely to emerge over the coming year, among them dollar bonds sold into the US, euro-denominated issuance and longer-tenor eurodollar issuance,’ says Kamel.
‘You will also start to see more discreet transactions [such as the recent one-year issue by ADCB arranged by Banc of America Securities and placed with a single account].
‘A greater understanding is also likely to develop between the issuer and the investor – there will be more bilateral, private placement-type deals, where an investor comes to the bank asking for a certain amount of paper of a certain tenor and denomination.’