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GCC bond sales hit $28b

DUBAI — Gulf Cooperation Council (GCC) bond sales are on track for a record year as the oil exporters exploit record-low borrowing costs to build infrastructure including airports and gas pipelines.

Government and corporate debt issuances in the six-nation group that includes Saudi Arabia and the UAE have crossed $28 billion this year, beating the $27 billion of bonds sold in all of 2011, according to data compiled by Bloomberg. That’s more than sales for the same period in 2009, which holds the annual record of $40 billion, the data show. GCC sales have expanded three times faster this year than the emerging-markets total, which is up 35 per cent to $769 billion.

State plans to invest more than $500 billion in Saudi Arabia and $130 billion in Qatar have persuaded companies including Saudi Electricity and Qatar Petroleum to sell bonds to fund expansion. The average yield on Middle East debt dropped 123 basis points, or 1.23 percentage points, this year to a record 3.85 per cent on Wednesday, according to HSBC/Nasdaq Dubai’s Middle East US Dollar Sukuk/Bond Index.

“There is a fairly decent pipeline of potential issuances out there, over a dozen names that ought to come between now and the end of the year” across the GCC, Mark Watts, head of fixed-income at National Bank of Abu Dhabi, which manages $1.1 billion, said by phone on September 10. “People are starting to wake up to the fact that there is true diversification in this region from an economic and financial point of view.”

GCC companies will raise at least another $6 billion this year, Watts said. Governments in the region sitting on about 30 per cent of the world’s proven oil reserves are developing infrastructure and industries including petrochemicals and aluminum to reduce their reliance on oil exports, which comprised more than 90 per cent Saudi Arabia’s 2011 public revenue.

Borrowing costs plunged this year as state-linked companies in Dubai paid or refinanced debt, dispelling concern they may default. That’s pushed average GCC default risk down 76 basis points in 2012 to 167 on Wednesday, according to CMA, which is owned by McGraw-Hill and compiles prices quoted by dealers in the privately negotiated market. That outpaced the 53 basis- point decline to 387 in the global average of five-year credit default swaps, which pay the buyer face value if the borrower defaults.

The region’s biggest debt issuance was the SR15 billion ($4 billion) of sukuk sold by Saudi Arabia’s General Authority of Civil Aviation in January. The authority is using the money for an airport in the Red Sea port city of Jeddah.

GCC sales surpassed last year’s total after state-owned Qatar Petroleum issued ¥85 billion ($1.1 billion) of Samurai bonds last month. Qatar, the world’s biggest exporter of liquefied natural gas, is building stadiums and roads as it prepares for the 2022 soccer World Cup. By this time in 2009, GCC issuers had sold $20 billion of bonds.

“Yields now are at relatively very low levels encouraging more leverage,” Khalid Howladar, a vice-president at Moody’s Investors Service, said in an e-mailed response to questions on September 11. “The sovereign issuance helps to set a pricing benchmark for local corporates and there was a lot of refinancing due this year.”

Companies including Dubai-based business park operator Jebel Ali Free Zone FZE are tapping bond markets. Jebel Ali will raise $1.85 billion from Islamic bonds and bank loans. Other companies are raising funds for expansion. Emirates Aluminium is seeking $4 billion from bonds and loans as it builds the world’s biggest smelter in Abu Dhabi, a banker familiar with the plan said last month. The Saudi civil aviation authority said in May would issue a second tranche of notes for an airport expansion in Riyadh.