All material subject to strictly enforced copyright laws. © 2022 Euromoney Institutional Investor PLC group
CommentGC View

Euros could help ME but are no quick fix

Bankers are growing increasingly worried about investor fatigue in the face of the huge supply of bonds from the Middle East, and some are suggesting that a switch to euros could be a remedy. Tapping the single currency could help, but it won't be a quick solution for everyone.

With many issuers in the Gulf — especially the sovereigns — holding the investment grade ratings that euro buyers so cherish, they seem prime candidates to take advantage of the abundant, central-bank inspired liquidity available in the currency.

With the $24bn of supply so far this year from the GCC, and the glut of bond issuance still expected before the end of the year and in 2017, bankers and issuers are right to worry that investors will at some point ask for higher new issue premiums or simply stop buying. 

There has already been much talk of issuers that have previously been Reg S only advocates adding 144A tranches in order to maximise demand. The talk of euros as a Middle East market saviour is a variation on this theme, and a sensible next step.

According to Dealogic data, 97.5% of the supply so far this year has been in dollars. Adding euro tranches diversifies the investor base, and bankers reckon demand would be such that even longer maturities would be achievable for the region. Adding Asian currency tranches serves the same purpose, but the volumes available would be much smaller. 

It is tempting to pump the cheap dollar well until it runs dry — EM dollar accounts are familiar with the Middle East and opening up a new investor base does take work — but showing that the region has access to another deep market could help keep cost of dollar tranches down too. 

The problem, and it is a big one, is that it will cost much more. The basis swap does not currently work in support of issuing in euros and swapping to dollars — after swaps, euro curves in the Middle East are around 50bp-60bp back of dollars. 

And a swap is necessary — euro yields are low and there are several Middle East issuers that already have strong links to Europe, for example Qatar, with its vast and sprawling property portfolio, but there are not many with large natural euro funding needs.

The medicine for dollar fatigue may eventually become more palatable, but it is likely be too bitter for many to swallow yet. 

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree