Dubai shock takes gloss off Middle East’s banner year

Last year was a tumultuous one for the Middle East’s bond market, as it climbed to the vertiginous heights of Qatar’s $7bn issue, and plummeted into confusion after Dubai World’s debt standstill request. Katie Llanos-Small takes a look at what it all means for the year ahead.

  • 13 Jan 2010
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2009 started so well for Middle East borrowers in the international debt markets. Sovereigns marched out first, beginning with Abu Dhabi in April, and culminating with Qatar’s impressive triple tranche $7bn whopper in November. It was the year that Middle Eastern borrowers really started to develop as capital market issuers, says Milena Ianeva, EMEA corporate credit analyst at Barclays Capital. "The market in Middle Eastern bonds consisted of a few illiquid issues before 2009. Issuance started to pick up in the second quarter."

Ianeva believes that the UAE and Qatar approached the market in a "sophisticated" manner, establishing sovereign curves which corporates could use as benchmarks.

Abu Dhabi was the first sovereign to come to market, with a dual tranche issue in April.

"Abu Dhabi basically re-opened the gates," says Igor Hordiyevych, managing director, head of CEEMEA debt capital markets at UBS in London. "They paid a decent spread, but it’s traded up and led the market higher. It gave people confidence, and it showed that there weren’t problems everywhere in the Middle East."

Then Bahrain came, as did Dubai. In November, Qatar astounded the market with its second bond issue of the year, a $7bn transaction with five, 10 and 30 year tranches. The issue’s size left bankers away from the deal gobsmacked. "Extraordinary", "staggering", and "phenomenal", they said.

The deal attracted over 500 investors who placed nearly $30bn of orders.

Fabianna del Canto, syndicate official at Barclays Capital, one of the deal’s lead managers, says that with cross-over interest from high grade investors as well as the traditional emerging market base, the deal was typical of what the region had been building up to over the year:  "Qatar’s trade is a live example of general trends in the Middle East in 2009."

She adds that the international, diversified investor base pushed orders to their extraordinary levels: "The books couldn’t have reached that size without having participation from all areas of the fixed income investor base." 

Once the market had been warmed up by sovereign issues, several companies and financial institutions came to market. Kuwait Project Company, Kipco, was the first private sector firm to issue internationally, launching a $500m seven year in early October. Banks hit the road mid-year to present their stories to investors, and trades came in the fourth quarter. Commercial Bank of Qatar printed $1.6bn in November, just over a third of which was lower tier two credit; Abu Dhabi-based First Gulf Bank sold $500m a week later.

Spread factor

Although issuance levels rose, across the Gulf many issuers continued paying higher spreads than similarly rated borrowers from other parts of the world. This was a pull factor for many international investors.

"The Middle East is attractive to investors in terms of spread to ratings," says Raphael Marechal, senior fixed income portfolio manager at Fortis Investments in London. "You perhaps could say that the rating doesn’t correctly reflect the risk."

Over the course of the year, issuers worked to expand their sources of funding beyond the local investor base. As well as using international roadshows to raise their profile, issuers looked at the structure of deals to diversify their investor base.

Middle Eastern investors rarely buy into paper with tenors greater than five years, for example. So multi-tranche issues with staggered maturities were an opportunity for borrowers to expand their investor base as well as to extend their maturity profiles.

Investor diversity was also a factor at play in allocations, according to Ianeva. "From what we hear, allocations for local investors have been lower, which then has an impact in the secondary market where local investors try to get into these deals," she says.

"This is an interesting dynamic of the market which has been one reason for the strong performance of new issues from the region."

Investors eyeing the details

However, warming investor sentiment to the Gulf was turned ice cold by Dubai World’s November call for a six month standstill on what later transpired to be a $26bn pile of debt.

The announcement jolted markets around the world. The immediate reaction was panic. Markets were starved for details on the announcement, which was released after local markets closed for Eid al-Adha holidays. But as information trickled out, international markets relaxed somewhat as the contagion effect appeared limited, and later rallied when Abu Dhabi, belatedly, came to the rescue with $10bn to help its neighbour meet its obligations.

The damage seemed mostly contained to Dubai itself, however. Jeremy Brewin, fund manager for emerging markets debt at Aviva Investors, says that Abu Dhabi risk, for example, is still attractive: "I obviously have every confidence in Abu Dhabi and expect them to come back to the bond market sometime in the first quarter of 2010 and I look forward to buying their bonds — if the terms are sensible of course."

Observers tell EuroWeek that one of the long lasting effects of the Dubai World restructuring on the region should be greater investor differentiation of Gulf credits.

Sjoerd Leenart, co-head of emerging markets origination, derivatives marketing and structuring for CEEMEA and Latin America at JPMorgan explains: "Investors felt Middle East credit was attractively priced last year.

"The events in Dubai do not mean that investors’ positive sentiment won’t continue, but they will make a bigger differentiation between the region’s credit stories."

This year, investors will look over covenants with a sharper eye, and will distinguish more seriously between implicit and explicit guarantees of support. Moody’s started the scrutiny in December, when it put borrowers related to the UAE and Abu Dhabi governments on review for possible downgrade, citing the need to reconsider assumptions about implicit government support.

Further knock-on effects from Dubai World’s debt standstill announcement may continue this year, but Aviva’s Brewin remains positive on the long term future of the emirate: "I am also keen to examine investing in Dubai as a credit, albeit after the current turmoil is over.

"But I am not sure that complete clarity on risk is ever truly available. That means that investors need to work closely with borrowers and build a relationship that is durable, broad and long lasting."

  Nakheel scare unlikely to knock sukuks off course


 Islamic financing continued its development as an asset class last year. As investors became more comfortable with the structures, borrowers from outside the Islamic world used Shariah-compliant fixed income products to raise funds.

The asset class took a step into the big league, when the market was given some on-the-job training about how the products work in default situations. "Sukuk default was the main event in the market last year," says Mohamed Damak, Islamic finance analyst at Standard & Poor’s in Paris. "The market is still in its infancy, so defaults are providing important information to the market on how these products work in a default situation."

Borrowers in the Gulf have issued sukuk for around 10 years. But there is still little certainty around what to expect when sukuk cannot be repaid — although the belief held by some that sukuk is a type of asset backed security has been clarified as a fallacy.

Over recent years, international investors have become more comfortable with the asset class through continued exposure to Shariah-compliant issues. Sukuk, particularly those from Middle Eastern issuers, no longer sell at a premium to conventional bonds. Abu Dhabi’s Tourism Development and Investment Company, for example, sold a $1bn sukuk in October at 230bp over mid-swaps, the same it would have paid for a conventional issue, bankers away from the trade calculated.

As international investors become more comfortable with sukuk, issuers outside the Muslim world are more frequently considering the asset class as a viable way of diversifying their investor base.

Last year, General Electric and the International Finance Corporation showed that non-Islamic entities could successfully sell sukuk. In October, the IFC issued a $100m five year sukuk to fund projects in the Middle East, and the following month General Electric issued $500m in sukuk, becoming the first US corporate borrower to issue in the format.

This year, investors are likely to deepen their familiarity with the sukuk, say bankers, despite the Nakheel episode towards the end of the year when the repayment of its Islamic bond was in doubt.

"Sukuk will become more of an international asset class, and more issuers outside the GCC will look to tap this asset class," says Gaurav Arora, of Middle East debt capital markets at BNP Paribas.

Certainly, with international eyes focussed on Dubai World’s restructuring, the global markets will continue to learn more about sukuk.

  • 13 Jan 2010

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 58,137.72 186 8.23%
2 JPMorgan 57,032.77 202 8.08%
3 Barclays 49,551.65 159 7.02%
4 Bank of America Merrill Lynch 42,095.04 147 5.96%
5 Deutsche Bank 38,217.89 137 5.41%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Bank of America Merrill Lynch 6,045.16 4 18.58%
2 BNP Paribas 1,742.18 7 5.36%
3 Credit Agricole CIB 1,539.94 8 4.73%
4 MUFG 1,257.24 4 3.87%
5 SG Corporate & Investment Banking 1,165.08 6 3.58%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 UBS 998.25 3 13.49%
2 Citi 693.55 2 9.37%
3 Morgan Stanley 572.72 3 7.74%
4 Bank of America Merrill Lynch 509.34 3 6.88%
5 Jefferies LLC 409.89 4 5.54%