The primary market for Gulf borrowers is experiencing a flurry of additional tier one (AT1) capital issuance. Borrowers are starting with tight pricing and going even tighter. But issuers should be careful not to push too hard when investors know others are lining up deals of their own.
Three Gulf banks issued AT1 sukuk last week: Warba Bank from Kuwait, with a $250m trade, followed by Saudi Awwal Bank and Bank Albilad from Saudi Arabia, with $650m each.
Saudi Arabia’s Alinma Bank has mandated for an AT1 sukuk this week and more issuers will come before the month is over.
Initial price talk is starting at tight levels for these deals and issuers are squeezing it even further during bookbuilding — 6.25% for Warba and 6.5% for SAB and Albilad’s bigger trades. They are paying a positive new issue premium but the aggression is causing exasperation among some in the market.
For one international investor, these yields were too low to be of interest. Being sukuk, these deals are tapping an investor base that is much less price sensitive than the international crowd. But international buyers are still a big enough chunk of the orderbook for their opinions to matter.
Their opinions matter especially when they start to think they can miss one deal and wait for the next one, safe in the knowledge that the pipeline is brimming.
International capital market debutants, like SAB and Albilad, should be particularly mindful. Buying an established credit is always an easier option all other things being equal.
Investors can have long memories too. If they believe an issuer went too far on pricing on one trade, then a few years later, when the bank comes to the market again, they may require more persuasion — in the form of extra yield — to buy the next time around.
It's a case of so far, so good for the banks to have priced deals so far but issuers must be mindful that the market has its limits on pricing, just like any other.
Bahrain’s Arab Banking Corporation pulled its AT1 bond during bookbuilding in January. That bank is not as highly rated as those that have come in the past few weeks, at BBB-/BB+, and it was not a sukuk. But it still serves as a warning that success isn't guaranteed.
Turkish issuers provide another example. A deluge of corporates and banks returned to the market in 2024 to post a record year for issuance volumes from the country. While investors lapped up the earlier trades, they grew full — and that meant they could be far more selective about what they bought later on.
Issuers should by all means drive a hard bargain but they must avoid pushing investors to breaking point.