The United Arab Emirates this week set out plans to rationalise the countrys debt issuance by selling bonds at the federal level for the first time in a move that is likely to also spur issuance from state-backed and private companies.
The Federal National Council the UAEs legislative body passed a public debt law that establishes a debt management office in each emirate and at the federal level. It limits federal debt to 45% of the countrys GDP, or Dh300bn ($81.7bn), whichever is lower but it also caps each individual emirates debt at 15% of GDP, implying that the bulk of funding will be
carried out by the new federal agency and not by individual emirates.
"Every government has to borrow, even if it has enough money, so it doesnt use all of its financial resources in infrastructure projects," said Obaid Humaid al Tayer, the minister of state for financial affairs, at the Federal National Council. The law requires each emirate to attain federal approval before accessing local and global credit markets.
The UAE is hoping that sovereign issuance will help establish benchmarks to deepen local debt markets and provide a new source of financing for companies that have traditionally relied upon bank lending. "The goal behind this law is to create a bond market, where bonds can be issued for five, 10 or 30 years, as is the case in developed countries," said Tayer.
The move comes amid strong global appetite for Gulf credit and a flurry of pitches for benchmark deals from western banks to state-backed borrowers in the region. The emirates of Abu Dhabi, Ras al Khaimah and Dubai have issued either local or foreign debut bonds within the past six years. In April, Abu Dhabi launched a blowout $3bn global deal. But rather than issue internationally, Dubai sold $10bn of bonds directly to Abu Dhabi in order to raise cash to pass on to state-owned companies facing refinancing pressure.
This week, the UAE said it would issue its debut bonds after seeking an international credit rating elating market participants. "I think this is excellent news," said the head of debt capital markets at an Islamic finance investment house in Dubai. "This will create a benchmark for corporates to issue and further boost investor confidence in the region."
The move for a sovereign credit rating, which is a legal requirement for foreign participation in cross-border deals but not for local issuance, strongly suggests the UAE will issue a US dollar global benchmark, said Philippe Dauba-Pantanacce, senior economist at Standard Chartered in Dubai.
But Richard Fox, head of Middle East and Africa Sovereign Ratings at Fitch, says a local debt issue is more likely as the issue is aimed at establishing a domestic yield curve for capital-seeking firms to price off. A source close to the discussions says a credit rating from one of the top three international agencies and a subsequent debt sale could take place by the end of the year.Fox said the UAE rating is likely to incorporate the privileged relationship between the federal authority and the wealthiest emirate, Abu Dhabi (Aa2/AA/AA) implying a high-grade rating is inevitable.
This week, market rumours surfaced that a Gulf sovereign has mandated Nomura for a yen-denominated bond. But bankers at the Japanese institution refused to comment.
"You are looking at huge amounts looking to be raised by Gulf entities and if you can tap into different areas of liquidity, this strategy makes sense," said a Dubai-based banker at a UK bank. He added that a benchmark Samurai issue from Qatar could gain traction given the emirates huge importance as a supplier of liquefied natural gas (LNG) to Japan. Other bankers say it is more likely that Abu Dhabi has the vision to launch a non-US dollar-denominated global bond.
Abu Dhabis state-owned Tourism Development and Investment Company (Aa2/AA/AA) embarked on a roadshow with BNP Paribas, Citigroup, HSBC and Standard Chartered for a US dollar benchmark in Abu Dhabi and Dubai this week. The investor meetings conclude in Boston this Wednesday. The solid price performance of the recent trade for Mudabala another Abu Dhabi-backed company showed continued interest in Gulf corporate paper, said a banker involved in the new issue. The $1.75bn 2014s have tightened significantly since its issue at the end of April while Abu Dhabis April 2018s have tightened from 420bp over US Treasuries to 360bp this week.
In any case, borrowers will have to issue soon before the traditional summer lull in July and the month-long Ramadan, starting in the third week of August, cordons off market access.