Middle East liquidity is facing an increasingly stern test as a range of sovereign and bank issuers tap the market. Not all issuers are getting through unscathed.
Saudi Arabia, Oman, Bahrain, Lebanon and Jordan had all either issued or begun marketing deals by mid-November. On the banking side, National Bank of Oman, Gulf Investment Corporation, International Bank of Qatar and Commercial Bank of Dubai have all been active, with varying degrees of success.
Concerns have grown about the region’s capacity to digest an increasing volume of issuance following the cancellation of a deal from Abu Dhabi Commercial Bank in September. Commercial Bank of Dubai then completed a deal in early November – but that raised as many questions as it answered.
The bond raised $400 million in a deal that placed half of its distribution into the Middle East. But the market had been expecting a benchmark, which generally suggests at least $500 million. Initial price guidance had been “mid-to-low 200bp over mid-swaps”, guidance which then changed from spread to yield with new guidance of “4%”. That ended up being the final yield, equating to about 235 basis points.
That bond followed the cancellation of a deal by Gulf Investment Corp, which finished a five-city global roadshow on November 2, again with expectations (albeit never explicitly stated) of a $500 million deal. Those close to this deal suggest that it could have been completed, but that the issuer was not happy with the price it would have had to pay.
Next off the rank was National Bank of Oman, which, notwithstanding the clear headwinds for conventional issuance, nevertheless pressed ahead with an additional tier one (AT1) deal, eventually raising $300 million through a no-grow Reg S five-year format, priced to yield 7.875%. While some in the market wondered why anyone would attempt a subordinated perpetual deal in the same week that one more mainstream bond had been pulled and another downsized, the leads may have felt there was nothing to be gained by waiting because there was no good reason to expect sentiment to improve.
At the time of writing, International Bank of Qatar was concluding a roadshow for a senior unsecured deal. “Not only is there a drain on Middle Eastern liquidity,” says one banker, “the problem is we already seem to be hitting resistance from international investors to buy paper from the region.”
There is brighter news in the sukuk markets, where Qatar Islamic Bank raised $750 million of five-year Reg S funding on October 20 with a minimum of fuss, paying 2.754%. Bassel Gamal, group CEO of QIB, says the deal attracted more than $1.75 billion in orders. By its own standards, it paid heavily – 135bp over mid-swaps, compared, for example, to 125bp for a similar deal from Dubai Islamic Bank in May despite DIB being rated a notch lower.
Gamal attributed the deal’s success to “the continued strong support and confidence of international, regional and local investors in the fundamentals of Qatar’s economy, its strong banking sector and Qatar Islamic Bank’s underlying credit quality”, and no doubt there is some truth in that, but perhaps it also demonstrates the role Islamic accounts may play in a time of weak conventional liquidity.
A $500 million sukuk from Saudi Arabia’s Arab Petroleum Investments Corp in October showed continuing appetite for Islamic paper: 80% of was sold in the Middle East. And a $500 million corporate real estate issue from UAE’s Majid Al Futtaim Group was also Islamic: it raised 10-year funds and priced flat to its existing curve.
Albaraka Turk has opted for the sukuk format for its forthcoming Basel III-compliant Reg S tier-two subordinated deal, despite the fact that no such deal has ever been done from Turkey as a sukuk. Saudi Electricity, too, has approval for a dollar sukuk programme of up to $1.5 billion, announced in September.
Sovereigns have, so far, had a relatively easy time; Jordan raised $500 million on November 4, and at the end of October Lebanon raised a $1.6 billion three-tranche Eurobond including a 20-year dollar tranche, its longest ever.
But even with the Lebanon blow-out, not all is as it seems: the notes are part of a voluntary exchange programme for existing bonds, Lebanon’s central bank was responsible for $500 million of the demand, and Lebanon’s vast diaspora and the need for its banks to buy any new government paper tend to distort the behaviour of sovereign bonds. So make no mistake: the Middle East’s liquidity crunch is real, and not about to ease.