JEDDAH -– Gulf region's issuance activity is likely to remain fairly robust in the coming quarters, partly because of refinancing requirements, partly thanks to formally approved issuance programs by a growing number of regional companies, most notably banks, the National Commercial Bank said in its latest GCC Financial Market Quarterly. The report noted that a number of regional governments are interested in using bonds and sukuk as a liquidity management tool while stimulating the development of the capital markets more broadly. For instance Qatari banks hold some QAR110 billion worth of government debt instruments. Moreover, bonds are likely to play a role in supporting some of the region's ambitious infrastructure projects. Qatar Petroleum's petrochemicals subsidiary Qapco announced this spring that it intends to build two new plants with a total cost of $10 billion. Among other issuers, Kingdom Holding of Saudi Arabia in June selected banks for its debut bond, expected to be in Saudi riyals but likely not imminent. The shareholders of Oman's Renaissance Services in June approved an OMR100 million bond issue. Although the structural drivers for continued GCC bond issuance are strong, the uncertain market environment, especially the unusually elevated risk of exogenous shocks may have profound implications for the timing of issues with the potential consequence of continued quarter-to-quarter volatility. Moreover, corporate issuance during Q2 continued the established pattern of heavy bank dominance, albeit generally with fairly modest volumes. Of total number of 10 issuers, all but two were financial service providers. Commercial Bank of Qatar (CBQ) opened the quarter with a $500 million issue followed by an OMR50 million ($129.9 million) maiden offering by Oman Arab Bank (OAB). The latter attracted subscriptions of OMR104.5 million, mainly from local institutions and was listed on the Muscat Securities Market. In the UAE, Mashreqbank in May placed a $50mn two-year bond priced at the three-month LIBOR. Among other Emirati banks, Abu Dhabi Commercial Bank (ADCB), National Bank of Abu Dhabi (NBAD), and Emirates NBD all returned to the market with issuance of $162.6 million, $25 million, and $146.6 million, respectively. Issuance by ADCB included tranches in Malaysian Ringgit (MYR310mn) and Chinese Renminbi (CNY200mn). CBQ obtained the most favorable pricing at 3.375 percent. ADCB paid 3.7-5 percent, NBAD 5.01 percent and Emirates NBD typically 5.3 percent. The OAB bond had a coupon of 5.5 percent. Tenors were typically five years with the exception of NBAD's $25mn 30-year issue in May and ADCB's $30mn 20-year bond in June. Also in the financial services space, Doric Nimrod Air Finance Alpha of the UAE placed $587.5mn in nine and 12-year tranches at 5.125 percent and 6.5 percent, respectively. Al Omaniya Financial Services returned to the market with a small $26mn five-year issue priced at 5.5 percent. The UAE mall developer Majid al Futtaim returned to the markets in July with $500 million issue after its $400mn sukuk in February. The bond is part of a delayed $2 billion medium-term notes program established last year. The seven-year issue has a coupon of 5.25 percent, down from 5.85 percent in February. Middle East issuers were allocated 19 percent of the June issue. 36 percent went to the UK, 25 percent to Europe, and 20 percent to Asia. Al Argan International Real Estate Company issued a KWD26.5mn BBB- rated five-year bond in April, the first Kuwaiti real estate bond issue since June 2010. The fixed tranche has an interest rate of 6.25 percent. After a period minimal sovereign activity, the governments of Bahrain and Oman returned to the conventional bond space. The Kingdom of Bahrain in June issued a $1.5 billion 10-year bond priced at 6.125 percent. This was the government's first conventional bond since 2010 and structured as a Reg S/144A issue open to qualified international investors. It followed a $750 million sukuk in November. The bond was sold to institutions, 14 percent of which are domiciled in Bahrain, 29 percent elsewhere in the Middle East, 16 percent in the UK, 14 percent continental Europe, 14 percent in the US, and 11 percent in Asia. Bahrain's pricing was placed at 462.5 bps over midswaps which translated into 6.375 percent. The $750 million sukuk last year was priced to yield 6.273 percent. It was yielding 4.8 percent in the run-up to the new issue. Bahrain had been planning a $1 billion bond already at the beginning of 2011. Bahrain is rated BBB by Standard & Poor's but its CDS spreads have come down markedly in recent months as confidence has returned after a period of unrest. The country ran a smaller than expected budget deficit o $83 million last year but is extremely vulnerable to oil price corrections as the 2011 break-even oil price was estimated at $114 per barrel. Moreover, according to the bond prospectus, the $20 billion GCC aid fund established last year has not yet been capitalized and Bahrain is yet to receive its first allocation. More encouragingly, Bahrain's external debt is only 14 percent of GDP. The sukuk market has remained one of the brightest spots of the GCC financial sector over the past quarter. Although overall issuance in Q2 fell short of the volumes seen in the opening months of the year, many of the positive trends observed during the past year have not only continued but been further consolidated. New types of issuers are tapping the market and activity has resumed even in the sovereign segment. Q2 saw a total of nine issues of more than a year with an aggregate value of $5.0 billion. This was down on Q1 issuance of $8.3 bilion but ahead of the $3.3 billion seen in 4Q11. In a departure from the commanding Saudi dominance during Q1, Saudi and UAE issuers were almost equally important. Three UAE names placed a total of $2.4 billion in the market while Saudi Arabia (including the Jeddah-domiciled Islamic Development Bank) saw a total of five issues worth just under $2.4 billion. One Kuwaiti issuer sold $101.6 million worth of sukuk. Global sukuk issuance during the quarter rose to $23.9bn, down on $35.3 billion in Q1. In spite of the resilience of the Gulf region, Malaysia remains the dominant sukuk market internationally. Overall, Malaysia was home to 68 percent of the $210bn of sukuk outstanding globally as of the end of 2011. Among interesting innovations, Q2 saw Malaysia Airlines in June issue a landmark MYR2.5 billion perpetual sukuk. Oman issued its 40th OMR100 million ($259 million) Government Development Bond in June. The offering proved highly successful with bids totaling OMR209.4mn with an average bid of 4.5 percent. The coupon rate for the 10-year bond is 5.5 percent. The funds will be used for budgetary purposes. The country is projecting an OMR1.2 billion deficit this year, equaling some 5 percent of GDP. The Central Bank previously announced plans to issue OMR200 million of sovereign debt this year. Kuwait continued its regular Treasury Bond issuance. There were a total of four issues with tenors in excess of a year. These ranged from two to seven years and totaled $604.2 million in value. Apart from liquidity management tools, also regular one-year Treasury Bonds continued to be issued by the Central Bank. The aggregate value of six issues was $1.7 billion. – SG
