x Abu Dhabi, UAEThursday 18 January 2018

Big appetite for bonds, sukuk returns

With the US Federal Reserve's stimulus efforts winding down, local companies hurry to take advantage of easy credit conditions with new bond issuances.

The current favourable economic climate has encouraged Middle East companies to return to the bond markets. Delores Johnson / The National
The current favourable economic climate has encouraged Middle East companies to return to the bond markets. Delores Johnson / The National

Companies in the Middle East are heading to market in great numbers with bonds and sukuk, as they rush to take advantage of the end of stimulus measures in the US and the region's political turmoil changes course.

A combination of government bond purchases and historically low interest rates have flooded the world economy with cheap liquidity, creating an attractive environment to raise funds on bond markets.

The second tranche of quantitative easing, the Federal Reserve's asset purchase programme, is expected to expire on June 30. A steadily increasing number of bond and sukuk issuances in the region would also encourage companies that held off from issuing during the region's recent political unrest, said Christopher Niehaus, the regional chief executive officer for UBS Investment Bank.

"As momentum starts to build and appetite starts to come back, more issuers will return to market," he said. "There's still a lot of backlog here. Earlier in the year, the political situation had slowed down deal momentum."

Bond and sukuk issuances from the Middle East almost ground to a halt during the region's political unrest in the first quarter of this year, as companies feared slack demand from international investors. Highly rated companies with links to governments, such as International Petroleum Investment Company and Mubadala Development, were among the few coming to market during that time. Mubadala is a strategic investment company owned by the Abu Dhabi Government.

However, issuers are now returning to credit markets as the turmoil becomes less of a concern globally.

HSBC Middle East recently sold US$500 million (Dh1.83 billion) of five-year sukuk, the largest Sharia-compliant issuance by a conventional issuer.

Andrew Dell, HSBC's head of global capital financing, said there had been significant demand despite testing times on markets.

"Looking at the deal in context, it is a significant success for HSBC Middle East to structure a well-received sukuk, that priced with zero new issue premium," he said. Other banks have also successfully returned to credit markets, with Sharjah Islamic Bank recently selling $400m of sukuk, while Islamic Development Bank raised $750m.

Companies outside the banking industry are also dipping their toes in the water, with Emirates Airline launching a $1bn five-year bond on the London Stock Exchange last week.With market conditions easing, Dubai's credit default swaps, which insure buyers of debt against missed payments and reflect the likelihood of a debtor to default, have now fallen to their lowest levels since Dubai World requested a standstill from creditors in November 2009.

The surge in new issuances came as a result of persistent low rates globally, said Ahmad Alanani, the head of Middle East fixed income at Exotix. "There's been a strong new issue pipeline globally." "Issuers everywhere are looking at this month as being the last window of opportunity to issue before the end of quantitative easing in the US, which is bound to cause a readjustment in rates," he added.

"The turmoil in the region seems to be priced in or subsiding, and people have become very nonchalant towards it," he added. "The appetite and sentiment has certainly come back on the back of that."

Economists said the effect on corporate lending was indirect, but would still make a difference for companies seeking to borrow.

"There is no economic theory which dictates that rates will rise due to the end of QE2, as one of its purposes is to create a positive wealth effect and anchored inflation," said Steen Jakobsen, the chief economist at Saxo Bank. "However, recently we have seen inflation expectation [which drives rates] has been increasing - if this continues the marginal cost will rise."