New issue premium is back in Gulf's bond market


Published — Thursday 14 February 2013

Last update 13 February 2013 1:18 am

| نسخة PDF Print News | A A

DUBAI: After largely disappearing last year, the new issue premium is back in the Gulf's bond market - a prospect which is likely to slow though not halt debt sales by a wide range of issuers this year.
For six months or so, Gulf issuers only had to pay a tiny premium above the secondary-market yields of their outstanding bonds when they issued new debt — or in many cases, no premium at all.
That was because of record-low US Treasury yields as well as the dramatic improvement of the Gulf's image in the eyes of international investors, as Dubai and other economies recovered from the global financial crisis.
In the last couple of weeks, however, it has become clear that a back-up in US Treasury yields and strong global equities mean new Gulf issuers will once again have to pay substantial premiums.
"We have to take into account the global headwinds and investors' mood, as there are periods when the markets go through periods of softness, as the one we are witnessing now in the global markets," said Sami Mahfouz, head of Standard Chartered's global markets business for the United Arab Emirates.
"This needs to be taken into consideration given that significant demand is also from the global investors and not just regional."
In a sense, the Gulf is paying a price for the increase in the popularity of its bonds among international investors last year. Previously, when almost all demand for bonds came from cash-rich institutions within the region, pricing of new issues was partially insulated from global trends; now the global environment cannot be ignored.
After a massive rally at the beginning of this year, emerging market hard currency bond funds experienced outflows for the first time in 35 weeks in the week to Feb. 6, according to data from EPFR Global.
For some analysts and investors, the shift in the bond market is not a short-term phenomenon but the start of a long-term process.
"The great bull market in bonds is coming to an end. People get anchored on a view that a particular asset class is going to give double-digit returns all the time," Gary Dugan, chief investment officer for Asia and the Middle East at Coutts, the private banking arm of Royal Bank of Scotland, said at an event in Dubai last week.
"There is a serious risk that you can lose money in bonds or sukuk this year, so we are telling clients to start looking at equity instruments."
A very few emerging bond markets have been able to ignore the trend. One is Turkey, where Akbank was able to command very tight pricing of its 1 billion lira ($ 530 million) Eurolira bond at the end of January.
The Gulf is not one of those markets, however. The current mood means issuers will need to "leave something on the table for investors to put in the big orders", said one regional fixed income trader.
Another trader estimated borrowers would now need to pay a 15 to 20 basis point new issue premium for longer-dated bonds.
That may be an underestimate; Russia's VimpelCom had to pay a new issue premium estimated at between 25 bps and 40 bps on the dollar tranches of its $ 2 billion bond sale last week.
Dubai paid no new issue premium - it actually priced inside its outstanding bonds - when it raised $ 1.25 billion from a two-tranche bond sale in late January. But the bonds soon came under selling pressure in the secondary market.
The 3.875 percent 10-year sukuk, which priced at par, has traded below par since issue and was bid at 98.0 cents on the dollar to yield 4.116 percent yesterday.
The change in the bond market's tone already seems to be influencing Gulf issuers. There have been no conventional bond or sukuk deals from the region since Emirates airline priced a $ 750 million, 12-year amortizing bond in late January.
Just a few weeks ago, the market was expecting the first quarter of this year to be a busy period for new issues.
One potential borrower is state utility Dubai Electricity and Water Authority (DEWA), which has said it plans a sukuk issue of up to $ 1 billion in the first quarter.
Reuters reported last month that the company had mandated banks for the deal, but Chief Executive Saeed Mohammed Al-Tayer said on Monday that the timing of the issue was still to be determined.
"We are studying it and will decide on it next week," Al-Tayer said, without giving any indication of the tenor.
DEWA's existing $ 1.5 billion, 7.375 percent bond maturing in 2020 was yielding 4.0 percent yesterday, about 40 bps wider than a month ago.
"Tightening spreads are good for borrowers but the region has been mainly considered as a yield play, and investors are interested in generating yield from creditworthy names," Mahfouz said.
The return of the new issue premium while not deter Gulf issuers forever; yields are still a couple of percentage points or more below their level a year ago, and after a period in which they judge whether the new market environment is here to stay, issuers are likely to return to the market.
Abu Dhabi Commercial Bank announced this week that it had mandated banks for a bond sale of at least $ 500 million, while National Bank of Abu Dhabi is to consider issuance of convertible bonds and other instruments at a meeting next month.
But issuers may feel more pressure to come to the shorter end of the market to minimize the premiums they pay.
"Long-dated bonds are going to be tough (to issue) at the moment, but the right type of names can still come to the market. Investors are looking for the yield in the short end," said a regional trader.

What's happening around Saudi Arabia

ABHA: More and more young Saudi women are found involved in blackmailing men and extorting money, with some even boasting about their “successes,” thanks to social networking sites, dating apps and hacked smart phones. This is the latest phenomenon h...
JEDDAH: Vegetable markets in some areas have raised the price of a box of tomatoes to SR80, equal to the cost of half a gram of 18-carat gold. Many consumers in Qassim have been complaining of the high prices. However, a vendor, Ibrahim Al-Khareef, s...
JEDDAH: The Indonesian Consulate has promised to determine the authenticity of a video circulating on social media allegedly showing a Saudi man sexually harassing a maid in his kitchen.The 32-second video was reportedly taken by the Saudi man’s wife...
ALKHOBAR: The seventh Breast Cancer Awareness Campaign, organized by the Saudi Cancer Society in the Eastern Province with several government and private agencies, was launched here on Tuesday.The event, held under the sponsorship of Eastern Province...
JEDDAH: Nora Al-Askar was hospitalized at the Children’s Hospital in Hafr Al-Batin because of a high fever. Now she is in a coma with possible handicaps.Nora, a kindergarten pupil, may now have a mental or physical disability or both. She went into a...
JEDDAH: Two persons, a Saudi citizen and an expat, were injured in Al-Aridha, Jazan, when a number of rockets launched from Yemeni territory crashed into the area, said Maj. Yahya Abdullah Al-Qahtani, a Civil Defense spokesman.At around 8 a.m. on Thu...
RIYADH: There are an estimated 21 million Internet users in the Kingdom, according to data released by the Communications and Information Technology Commission (CITC).According to the report, Internet penetration in the Kingdom stands at around 66 pe...
ABHA: A Saudi engineering student has developed a video game which he has now put up on the Apple Store for download.Abdul Rahman Al-Kayyal said he took eight months, with the help of friends, to design and create the game called “INKY Death Road,” w...
ABHA: The World Tourism Organization (UNWTO) has praised the Saudi Commission for Tourism and National Heritage (SCTNH) for its development projects across the country.Omar Valdez, executive head of the UNWTO’s Themis Foundation, said that his organi...
RIYADH: The women’s campuses of King Saud University (KSU) and Princess Nora bint Abdulrahman University (PNU), the largest university for women in the world, hosted the “Your vote makes a difference” campaign ahead of the upcoming civic elections.“T...
JEDDAH: Former director of King Fahad Security College Maj. Gen. Fahad Al-Shaalan has warned against the dangers of easy availability of weapons in Saudi society.He attributed the increased possession of weapons by teenagers to eight main driving fac...
MADINAH: Three young men have been arrested for producing a video that accuses a local mayor and an official of corruption. The men are under investigation by officers from the Al-Mahad police station. The 22-second video shows the men pretending to...
RIYADH: Uzbekistan’s Ambassador Alisher Kadirov said Thursday that his country and Saudi Arabia are riding the crest of excellent bilateral ties.“Since the establishment of diplomatic ties 23 years ago, the two countries have been enjoying excellent...
JEDDAH: A special criminal court is prosecuting the first Saudi woman accused of joining Daesh after she pledged allegiance to its leader Abu Bakr Al-Baghdadi.The defendant is also accused of printing and pasting leaflets on mosque walls and lamppost...
JEDDAH: Prince Sultan bin Salman, president of the Saudi Commission for Tourism and National Heritage (SCTNH), has been elected as the World Tourism Organization’s (UNWTO) vice president. The decision was taken on Sunday by the Middle East committee...

Stay Connected