International investors are becoming more wary of Middle East debt, because of sub-prime losses in other markets and a shift towards financing being raised in local currencies.
Last year, global interest in Middle East debt was so high that many corporates in the region were able to sell more than 75 per cent of their bonds to international investors. According to some senior bankers in the region, there are now clear signs that the balance is shifting.
“If you look at a typical A-rated transaction in the middle of 2007, about 30 per cent of it was sold in the region, 20 per cent went to Asian investors, 35 per cent to European investors and the rest was sold in the US,” says the head of one syndications team at an international bank in Dubai. “Asia is now completely absent.”
One of the main factors behind the shift in appetite among overseas investors is the move away from pricing deals in US dollars, traditionally favoured by international investors (MEED 20:3:08).
Few local currency deals were done in 2007, while foreign investor appetite was high and the cost of dollars for local banks was relatively low.
However, as dollar funding has become more expensive because of the lack of dollar liquidity in the region, companies have increasingly been raising debt in currencies such as UAE dirhams and Saudi riyals, which are favoured by local investors.
International banks are often unwilling to take on the currency risk of lending in dirhams or riyals, in case there is a revaluation of the currencies that are pegged to the US dollar.
While GCC central banks have repeatedly ruled out any revaluation, pressure on the local currencies is increasing each time the US Federal Reserve cuts its interest rates – the latest 0.25 per cent cut came on 30 April bringing rates down to 2 per cent.
Meanwhile, regional banks are awash with local currencies, so are taking a more significant role in local currency tranches.
“Over the past three-to-five years, dollar deals out of the region were predominantly bought by international investors, with between two-thirds and three-quarters going to European and Asian investors,” says another banker based in Dubai. “Now we are seeing a definite contraction of international activity, and the Middle East is suffering.”
The recent AED6.5bn ($1.8bn) debt issue by the government of Dubai was dominated by local investors, with only 40 per cent being sold outside the GCC, accor-ding to one banker involved in the deal.
The changing market is also being seen among financing deals for large corporates. Dubai ports operator DP World sold 50 per cent of one of its dollar-denominated bond to US investors in June 2007. However, by the end of the year, it was targeting regional investors with the sale of $2bn worth of dirham-denominated bonds.
However, some bankers say that while international investors are more wary of deals priced in local currencies, any pessimism over attracting international support for financing deals is unfounded.
“Local currency tranches are all being taken up by regional banks,” says one Bahrain-based banker. “If there is any interest at all in dollar transactions, it is from international banks that have dollar liquidity.”
In an effort to tap into both pools of investors, there have also been a series of transactions with financing raised in both dollar and local currency tranches.
“It is partially true that international investors are less keen on Middle East deals,” says the syndication manager of one UAE bank.
“But every transaction now has dual currency tranches so local banks are lapping up dirham tranches and international appetite is covering the dollar tranches.”
Similar swings in demand have been seen in the region in the past.
“Over the past decade, there has been a lot of change in international investor appetite, with international banks dominating the 1990s, then the balance moving back to regional banks, and by 2007 international banks were dominant again,” says another senior Saudi-based investment banker.
The recent $4bn financing deal for Borse Dubai, which runs both the Dubai Financial Market and the Dubai International Financial Exchange, has demonstrated that international appetite for the right deal remains strong. About 80 per cent of the financing was raised from investors outside the region.
However, interest in the deal is thought to have been significantly boosted by its links with US-based stock market operator Nasdaq OMX, which owns a minority share in the Dubai firm.
The picture is slightly different in the project finance market, which relies more heavily on dollar funding and, because of the much larger size of the transactions and the longer tenor of deals, requires large international banks to play a more active role.
However, although the dearth of new project finance deals in 2008 makes it hard to gauge investor appetite, most project financiers expect the market to follow the corporate bond and loan market in offering more dual-currency investments (MEED 29:2:08).
Table: The shift away from dollar financing
|Deal date||Issuer||Value ($bn)||Currency|
|Jun 2007||DP World (two deals)||3.25||US dollar|
|Jun 2007||Dubai International Financial Centre||1.25||US dolllar|
|Jul 2007||Saudi Basic Industries Corporation (Sabic)||2.13||Saudi Riyal|
|Oct 2007||Abu Dhabi National Company (Taqa)||2.00||US dollar|
|Nov 2007||DP World||2.04||UAE dirham|
|Mar 2008||Taajeer||0.25||Saudi riyal|
|Apr 2008||Borse Dubai||3.78||US dollar/UK pound|
|Apr 2008*||Sabic||1.30||Saudi riyal|
|Apr 2008*||Taqa||1.13||UAE dirham|
*yet to close. Sources: Dealogic; MEED