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Middle East should breeze through big pipeline test

A fat pipeline of sukuk and bonds before the end of the month should add to what is already one of the busiest quarters on record for Middle East dollar deals. With Ramadan and the summer slowdown approaching, this extra surge is a big test of market depth — particularly for sukuk — but it is one that the market should pass comfortably.

So far this quarter there has been $6.39bn of dollar sukuk, discounting short term International Islamic Liquidity Management commercial paper. That volume is more than the $5.66bn in the same period last year and within range of the record $6.5bn from the third quarter of 2012.

A big new quarterly record is likely with Emaar Malls Group having priced its $750m sukuk this week and Turkish participation banks Kuveyt Türk and Albaraka Türk hitting the road to issue up to $500m each before Ramadan. A tier one bank sukuk is said to be in the offing, while Bank of Tokyo Mitsubishi could also tap Middle East investors in dollars.

On top of these deals, the conventional pipeline out of the UAE and Turkey remains strong, with Etisalat having issued about $4.3bn worth this week, Türk Telekom $500m, Rakbank on the road and a conventional bank tier one capital deal said to be imminent.

The influx of new deals comes amid a big pipeline of redemptions, so investors have plenty of money to put to work.

Aldar’s $1.25bn matured at the end of May, while QTel (now Ooredoo) has $900m maturing on Tuesday and Bahrain should pay a $750m maturity on June 17. Tourism Development and Investment Company’s $1bn 6.5% bond matures early in July and the company has said it is not coming back to the debt capital markets any time soon.

UAE and Turkey risk exposure is growing, but those markets are rallying hard. UAE deals, at least, will be anchored by investors based in the emirates themselves.

If the Middle East bond market’s relentless spread compression has brought any pause for reflection, it has been brief and cursory. Dubai’s 2023 bond price has climbed to a new high of 113.25, or just 85bp spread over benchmarks, while its 7.75% 2020 yields just 3.12%.

Investors are entering dangerous territory, where there is very little cushion against negative market surprises. But downside scenarios are unlikely while the US Federal Reserve keeps its course on rates.

Middle East bonds and sukuk look set for a strong run into summer. All the work by bankers and lawyers behind the scenes to get these deals over the line looks finally, all at once, to be paying off.

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