UAE guarantee to trigger surge in new bank debt
The United Arab Emirates’ decision to guarantee new bonds and loans issued by local banks is set to spur international issuance and boost regional liquidity.
On Tuesday, the UAE Federal National Council passed legislation to provide a government guarantee for new obligations of UAE banks. Although details have yet to be announced in full, analysts expect the programme to cover bonds, medium term notes, syndicated loans and commercial paper. The decision is set be rubber-stamped by Sheikh Khalifa bin Zayed Al Nahyan, president of the UAE and Emir of Abu Dhabi, and could be implemented as quickly as six weeks after that, said a market source.
"This is a strong sentiment of support for banks in the UAE," said Mahin Dissanayake, Gulf banks analysts at Fitch. This move is likely to trigger cross-border issuance as banks seek access to a globally diversified investor base while local players are more comfortable with the creditworthiness of UAE banks, said analysts. Bankers say a five to seven year tenor for bonds is most likely be covered in the guarantee programme in order to shore up bank balance sheets while longer-dated paper carries more risks.
Bonds issued internationally by regional banks through this federal guarantee would incur a small pick-up to Abu Dhabi’s $3bn April 2018s, followed by the respective new issue premium, said syndicate bankers.
To date, the federal government has boosted bank liquidity by guaranteeing deposits and allowing financial institutions to convert government deposits held at the ministry of finance into tier two capital to support bank balance sheets. Analysts are divided over which institutions will be eligible to use the guarantee. One debt capital markets banker at a Western institution said the federal authority’s support to top, mid and lower-tier banks across the federation established a precedent for a guarantee to apply to all UAE banks. However, one banking analyst in Dubai said this move risked undermining the sovereign’s creditworthiness by heaping on significant contingent liabilities.
Lending by Gulf banks came to a screeching halt in the last quarter of 2008 as the region’s economic boom went bust in the face of collapsing oil prices and the global liquidity drought. This has triggered swathes of asset writedowns, bankruptcies, and non-performing loans.
However, despite the flurry of global issuance from Gulf credits since April, the primary market is yet to entertain non sovereign-backed names. According to Standard Chartered, UAE banks have to-date issued less than $800m of bonds and syndicated loans in both domestic and international markets. This compares with $10bn in 2006 and 2007 and $5bn in 2008. This predominantly reflects the prohibitive cost of capital rather than banks seeking to improve their loan-to-deposits ratio. In addition, the upcoming maturities of both bonds and syndicated loans for domestic UAE banks are around $2.7bn for the rest of the year and $7bn in 2010 — two-thirds of these refinancing obligations are from Abu Dhabi banks.
Since this move does not provide capital injections directly, immediate political costs — such as government-directed loan disbursements or loss of management independence — for participating institutions may be avoided, analysts said. However, as witnessed in Western markets, the government guarantee could initially be seen as a kiss of death for issuing banks if markets fear further systemic weakness in the sector and counterparty risks.
"The government needs to lay down the law and implement it in such a way so it is not seen to be a stigma for banks using this guarantee," said Mary Nicola, economist at Standard Chartered in Dubai. "Investors want to see commitment from governments and affirmation that they stand behind banks," said Tony Bush, head of international banking and syndications at Emirates Bank in Dubai. "Over time, investors will become more comfortable and then banks can issue without a guarantee. The path is well trod and I do not believe there to be a stigma."
The full details of the scheme have yet to be clarified and bankers are urging an explicit sovereign guarantee to boost market confidence. "Foreign investors want to see a federal guarantee that is clear, transparent and unambiguous," said Bush.
Analysts suggest higher-tier banks which have major government stakes, which would typically issue senior unsecured notes, will be pressured to use the facility to avoid singling out weaker institutions. In addition, given the high financing needs and the expected surge in international issuance, federal authorities are set to be monitoring the timetable for issuance to avoid an over-supply in the market. This close collaboration between the government and banks is bound to increase political leverage over regional institutions, said market players.
This announcement is not a direct injection of liquidity, as a result, bond spreads and interbank rates are unlikely to be affected in the near term. One banker said that this market-positive announcement is likely to put UAE banks at a significant competitive advantage over regional peers and the likes of Qatar will be under pressure to follow suit.
The UAE federal government is also rumored to be providing a sovereign guarantee for Dubai to issue $10bn of debt. The emirate completed half of its $20bn bond programme through a debt sale in February to the UAE central bank at a subsidised annual coupon of 4%.
Some local market players say the potential move is in a bid to encourage international banks to provide funding and ease fears over the emirate’s debt burden. However, most observers doubt this will be a commercially priced transaction.
The liquidity trail blazed by Gulf credits in recent months has encouraged other top-quality issuers to come to the market. This week, Ra’s al Khaymah (an emirate of the UAE) mandated BNP Paribas and Standard Chartered to arrange investor meetings for a US dollar benchmark. The emirate will be in Singapore on Tuesday, Kuala Lumpur on Wednesday, Hong Kong on Thursday and London on Friday.
Ras Al Khaimah Investment Authority, its sovereign wealth fund, is a more frequent issuer with both conventional dollar benchmarks and Islamic sukuk bonds.
The emirate itself priced its debut international bond in February last year with a Dh1bn ($277m) five year Reg-S dirham-denominated sukuk at 115bp plus over three-month Eibor.
However, this will be the emirate’s debut dollar-denominated issue and pricing is likely to be competitive given the trail-blazing transactions of its wealthier peer Abu Dhabi, said a banker close to the deal.
In addition, the Islamic Development Bank has mandated BNP Paribas, Deutsche Bank and HSBC for a US dollar Sharia-compliant bond, said bankers.