Look beyond the US dollar
Euromoney, is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024
Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Sponsored Content

Look beyond the US dollar

All issuers should be looking beyond the US dollar when seeking new financing. Alternative currencies can bring several advantages, including lower funding costs and greater flexibility.

Hussain Hussain, director, debt capital markets, Middle East and Africa

The US dollar (USD) is the main source of funding for issuers in the Gulf Co-operation Council (GCC). According to Dealogic, more than 90 per cent of issuance so far this year has been in the dollar.

There are good reasons why it holds the greatest appeal. The market is big, liquid and provides access to the largest emerging market investor base. Moreover, many emerging market currencies are linked to the USD, making it a natural source of funding, especially for those issuers looking to establish themselves initially in the capital markets.

Being dollar-dependent holds dangers, however. An over-reliance on one source of funding can be restrictive for issuers and in some cases may result in them paying more than necessary.

Moving into different currencies and markets allows issuers to broaden their sources of financing by tapping new investors. This provides the opportunity to create pricing tension and competition for their credit across different markets, eventually driving down the overall funding costs.

It is necessary to take a longer-term view when seeking to access new markets. While some markets offer a pricing arbitrage immediately, issuers may find themselves paying a fuller price initially. However, the pricing premium starts to disappear once they become more widely known in that market.

For example, IPIC started tapping the non-dollar markets in 2011 when it went into the euro markets to finance an acquisition. The company returned in 2012 with a further euro issuance, which it was able to price at substantially improved levels as investors had become more familiar and comfortable with the credit story.

Similar to IPIC, a number of GCC financials have ventured into non-dollar markets, paying less because funding sources are more fragmented and they are able to take advantage of competition and arbitrage.

There is one other, smaller reason why issuers may choose an alternative market to USD. The US dollar market prefers having the benchmark sized deals (i.e. USD500 million or larger). This is because the market participants perceive such a minimum size as necessary to allow for sufficient liquidity in the secondary market. Issuers are faced with a choice: raise more than they need and suffer the costs of carry, or look elsewhere.

Asian currencies, such as the Malaysian ringgit, Hong Kong dollar, the Singapore dollar and the Swiss franc have been particularly popular with issuers as they allow smaller sizes to be launched and provide pricing arbitrage opportunities. In addition, these markets have plenty of liquidity and issues have been oversubscribed.

Finally, there are some concerns over when and how the US Federal Reserve might bring to an end and unwind its Quantitative Easing programme, which helped to underpin the US debt market. The fear that the demand for USD-denominated bonds might subsequently ease is another reason for issuers to explore funding diversification.

There are some drawbacks for accessing non-USD markets. In some instances, there is much more bureaucracy and legal work, which can take time and money.

Issuers will also have to invest in additional marketing to make themselves known to new investors and to make a mark. However, these costs will pay off as the issuer becomes better known, its documentation is established and its cost of funding improves.

Many investors across all markets are keen on investing in GCC issuers because they can offer a decent yield for the risk. Despite the underlying economic strength of the region, reflected by the region’s strong ratings, the inherent political uncertainty implies they offer good returns.

Once issuers are established in the US dollar market, where it is easier to build a presence, it would be prudent for them to explore different avenues to secure funding. A move into the non-USD market can provide access to new investors. It shows an issuer is not dependent on any particular investor base, creating competition for its credit. Finally, diversifying can allow issuers to capitalise on pricing arbitrage across markets.

The advantages outweigh the disadvantages. Exploring alternative markets could benefit all GCC issuers.

The absolute level of non-US dollar issuance from GCC countries has risen sharply since 2009. US dollar financing spiked in 2012 because of a surge in demand for sukuk debt from investors. 

For more RBS Insight content, click here


Disclaimer

The views expresses are those of the individual and do not necessarily represent the views of the Royal Bank of Scotland

The contents of this document are indicative and are subject to change without notice. This document is intended for your sole use on the basis that before entering into this, and/or any related transaction, you will ensure that you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc (“RBS”) will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on RBS for investment advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information and disclaims all liability for any use you or your advisers make of the contents of this document. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed.

Where the document is connected to Over The Counter (“OTC”) financial instruments you should be aware that OTC derivatives (“OTC Derivatives”) can provide significant benefits but may also involve a variety of significant risks. All OTC Derivatives involve risks which include (inter-alia) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity risk and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place to manage such risks. Therefore you should also determine whether the OTC transaction is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances.

RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding, or acting as market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein.

RBS is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority’ in the UK, in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the United States Securities Act of 1933, as amended. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC (www.sipc.org) member and subsidiary of The Royal Bank of Scotland Group plc. Dubai International Financial Centre: This material has been prepared by The Royal Bank of Scotland plc and is directed at “Professional Clients” as defined by the Dubai Financial Services Authority (DFSA). No other person should act upon it. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a “Professional Client”. This document has not been reviewed or approved by the DFSA. Qatar Financial Centre: This material has been prepared by The Royal Bank of Scotland N.V. and is directed solely at persons who are not “Retail Customer” as defined by the Qatar Financial Centre Regulatory Authority. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a “Business Customer” or “Market Counterparty”.

The Royal Bank of Scotland plc acts in certain jurisdictions as the authorised agent of The Royal Bank of Scotland N.V.

The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB.

RBS plc’s activity is regulated by the Central Bank of the United Arab Emirates.

Gift this article