By Adnan Halawi, team leader – fixed income, Zawya
THE GULF Cooperation Council (GCC) states witnessed the issuance of just above $52 billion* in bonds and sukuk during 2011, an increase of 19 percent over 2010. The increase came mostly in the form of sukuk which received a boost from an exceptional domestic issuance by the Qatar central bank in January 2011. The GCC bond market developments came in line with the political developments in the region and reflected the mixed economic trends and sentiments in the Gulf states.
Conventional versus Islamic
There was a substantial increase in the number and value of bonds that comply with Shariah. As many as 20 sukuk were sold worth $18.4 billion, an increase of 188 percent over the $6.4 billion raised from nine issues in 2010. The strongest boost came from Qatar, which sold a QAR 50 billion domestic bond in January, of which QAR 33 billion were in the form of sukuk.
Companies and governments are increasingly moving toward sukuk. The UAE’s Majid Al Futtaim recently chose to go for sukuk rather than conventional bonds in its first such offering.
On the other hand, issuance of conventional bonds in the region witnessed a nine percent drop. Yet, conventional bonds maintained their top position, capturing 65 percent of the total market. As sukuk becomes increasingly interesting for both the investors and the issuers, it is worth observing in which direction the market will be skewed in the future.
Country Breakdown
The UAE was the top issuer of bonds in the GCC in 2011. Despite the absence of any treasury or international sovereign bonds, the country’s companies and emirates, or states, continue to be the most active borrows in the GCC. $20.7 billion of bonds and sukuk were sold in 2011 by UAE entities. The UAE government is now working on a public debt law which could pave the way for the country’s first federal government bond.
Qatar is increasingly becoming a heavy issuer, a trend is that expected to persist given the economic boom the nation is witnessing and the huge project finance needs accompanying the economic growth.
Kuwait has a well-established conventional Treasury bond market with a relatively shy record of corporate issuance. 2011 witnessed the comeback of corporate issuers following a number of defaults that accompanied and followed the global financial crisis.
Bahrain, which witnessed political turmoil through most of 2011, succeeded in maintaining a healthy figure through its Central Bank’s diversified bouquet of bonds: short to long term, Islamic to conventional, and domestic to international.
Oman has the smallest bond market in the GCC with the absence of any Islamic bonds to date. The Sultanate could witness sukuk issuance as Islamic banking is high on its agenda in 2012.
Corporate versus Government
The GCC bond market is predominantly a government and sovereign bond market. Despite a handful of companies selling bonds to finance their expansion and growth, government entities continue to issue the largest chunk of these bonds. Quasi-sovereign issuers are as active as the sovereigns given the nature of businesses in the GCC. Big companies are typically owned or to a great extent supported by the respective governments and ruling families.
In early 2012, Saudi Arabia’s General Authority for Civil Aviation sold a SAR 15 billion ($4 billion) sukuk domestically. This is expected to set the benchmark for bonds issues from the Kingdom as well as trigger more fund-raising from Saudi sovereign entities.
International versus Domestic
GCC borrowers have a successful record of selling debt in the international markets. Bonds and sukuk worth $25.4 billion were sold internationally in 2011, almost the exact size of bonds sold domestically. GCC bonds continue to be welcomed by international investors. Most issuers from the region enjoy high credit ratings and are of investment grade, while defaults are fewer that their European peers.
GCC issuers sold bonds in 13 currencies worldwide – including the six domestic currencies. The other currencies include US dollar, which grabbed USD 19.6 billion or 37 percent of the total funds raised, followed by the Japanese yen, Malaysian ringgit, British pound and the euro.
Borrowers are expected to expand the basket of currencies as they diversify their sources of funds and hedge against exchange rate fluctuations. Also, some issuers chose cross-border issuance in Malaysia given the ease with which Islamic bonds are sold in the South East Asian nation, and to tap new wealth territories and pockets of growing interest.
Listing and Trading Bonds
As much as 33 percent, or $17.4 billion, of the bonds and sukuk issued in 2011 were listed on the London Stock Exchange. Lesser amounts were spread over European exchanges and some local bourses. However, the region’s exchanges are making efforts to grab a bigger share and attract more listings.
Qatar Exchange recently started trading sukuk and bonds – a step that is expected to boost liquidity and deepen the market.
Sector Breakdown
In line with the economic and business nature of the GCC region, proceeds from bonds and sukuk issued in 2011 went to governmental institutions, financial services and oil and gas entities, in that order. Other sectors are increasingly coming to the market. Saudi-based Almarai Company announced plans to tap the sukuk market in 2012. Should this materialize, it will become the first food and beverage sector entity in the region to tap the fixed-income market.
The unfavorable market conditions accompanying the Eurozone debt crisis, political and civil unrest in some Arab states, and tensions with Iran may have contributed to slowing the growth of fund-raising in the region. But the huge financing and refinancing needs, the robust economies of some countries, and the growth plans will help keep the bond market buoyant.
The pipeline for 2012 is healthy. Issuers that conducted non-deal roadshows in 2012 will eventually return to the market. Dolphin Energy, which failed to sell bonds in June 2011, came back to the market and sold $1.3 billion in February 2012. Other issuers will need to raise funds to repay debt.
The industry also witnessed and could witness more steps toward regulating the market, consolidation and increasing transparency. In 2011, the Gulf Bond and Sukuk Association published the first ever list of standards for Gulf debt issuers, followed by a compendium of GCC local-currency government markets.
As equity markets worldwide remain volatile, investors’ appetite for the region’s debt is expected to increase. Whether sukuk or bonds, the market will grow bigger on the back of the economic fundamentals. Questions remain, however, about how deep and liquid the market will become; how serious the governments are in supporting these initiatives; how receptive investors will be; and how diversified the investor base will become.
*Includes bonds and sukuk with tenor of one year and above. Source for all data and figures: Zawya Investor, Bonds Monitor (www.zawya.com/bonds) and Sukuk Monitor (www.zawya.com/sukuk)