Gulf's debt market gaining steam

Dubai - Foreign investors move beyond sovereign debt to issues from banks and corporations

The Gulf's market in international bonds is deepening as foreign investors move beyond sovereign debt to issues from banks and corporations - a shift that could change the way some issuers choose to structure their bonds.
Traditionally, foreign investors in Gulf debt have focused almost entirely on sovereign bonds because of their greater safety and liquidity. But a surge of sovereign issuance in the past 12 months, as Gulf governments cover budget deficits caused by low oil prices, is changing that pattern. It has put the region on the map for some foreign institutions, making them boost allocations to the six GCC states.
Institutions that fail to satisfy their appetite for GCC debt entirely with sovereign bonds look a few notches down the credit rating curve at bank and corporate issuers. Meanwhile, expanded sovereign issuance has created a complete yield curve for the region, making it easier for banks and companies to price bonds at levels which a range of investors accept.
"This is a market that attracts both investment grade and emerging market investors," said Hani Deaibes, head of Middle East debt capital markets at JPMorgan.
"What is happening is that the large issuances from sovereigns have made this market more relevant to investors. This has increased the interest in corporates and banks from the region. There's more understanding of the market."
In 2016, GCC bond volumes totalled a record $69 billion, more than double the usual level since the mid-2000s, Thomson Reuters data shows. Over $40 billion has been issued so far this year.
Jumbo sovereign deals include Saudi Arabia's $17.5 billion debut international bond last year, the largest issued in emerging markets, plus an $8 billion bond from Kuwait and Saudi Arabia's $9 billion international sukuk, or Islamic bond, this year. Allocation statistics for at least one recent Gulf issuer suggest the balance of demand by geography and investor type is changing.
A $750 million senior secured bond issued in May by Kuwait's largest commercial lender, National Bank of Kuwait, was mostly bought by US-based investors. Some 57 per cent of the paper went to them, followed by Middle East investors with 26 per cent, Europe with 13 per cent and Asia with four per cent.
By contrast, 43 per cent of a $700 million bond issued by NBK in 2015 went to Middle East investors; US buyers took only two per cent.
"From an emerging markets perspective this region has become more relevant, in particular in the US, simply by virtue of the sheer volumes issued since last year," said Iman Abdel Khalek, Citigroup's head of regional debt capital markets.
"NBK has been the first bank to take advantage of this. The pricing outcome was exceptional and was a direct outcome of the bid from US investors, who also bought the Kuwait sovereign bond earlier in the year."