Gulf sukuk: Order books ‘probably inflated’

Updated 22 March 2013
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Gulf sukuk: Order books ‘probably inflated’

DUBAI: Bond and sukuk issues from the Gulf region in the past few weeks have drawn huge investor order books but then performed poorly in the secondary market — a sign that some of the orders are not as solid as they appear.
In order to ensure they obtain part of a new issue, institutional investors are bidding for larger amounts than they actually want, because they assume their bids will be cut when the issuer decides on allocations, traders and analysts say.
The heavy bids are causing the pricing to tighten dramatically in the primary market, setting the bonds up to fall in the secondary market when it becomes clear that underlying demand for them at the final pricing is not as great as the order books suggested.
This phenomenon can happen in bond markets around the world but it has been particularly acute in the Gulf during recent weeks, partly because of global trends and partly because of the nature of the Gulf’s investor base, which is cash-rich and heavily focused on bonds from within the region.
“The secondary market performance of deals in 2013 suggests that order books were probably inflated,” said Doug Bitcon, head of fixed income funds and portfolios at Rasmala Investment Bank in Dubai.
“One only has to look at the performance of the recent DIB Tier 1 deal to realize that a large portion of the $ 14 billion book was fluff.”
Dubai Islamic Bank issued a $ 1 billion perpetual, hybrid sukuk this month to boost its Tier 1 capital. It was only the second such deal from the region, and arranging banks said the order book totaled a massive $ 14 billion.
On the back of that, pricing tightened spectacularly from initial guidance in the 7.0 percent area, which was considered generous to investors, to 6.25 percent. Private banks, which were given a 50 basis point concession on the pricing, took 32 percent of the paper.
The sukuk has performed sluggishly since then, and was bid at 99.85 cents on the dollar on Wednesday afternoon, according to Thomson Reuters data. During the same period, many other emerging market bonds have performed well.
In some cases, Gulf order books this year have been so large that issuers have been able to price their bonds at no premium to their existing yield curve, or even inside the curve — once again, setting the issues up for weak secondary market trading.
The Dubai government’s $750 million, 10-year sukuk issued in January got an order book of $11 billion. It priced at 3.875 percent, well inside guidance of 4 percent and about 12.5-17.5 bps inside Dubai’s outstanding 2022 sukuk. It has traded below par since then.
“The recent deals have priced so aggressively that there is little left on the table for short-term performance in the secondary market,” said Daniel Broby, chief investment officer at Silk Invest asset managers in London.
There are domestic and global reasons behind the sharp contrast between primary and secondary market performance. Although Gulf investors are showing signs of putting more money into bond markets outside the region, they traditionally focus closely on issues from within the Gulf.
They are flush with cash because of high oil prices and solid economic growth, and bond supply within the region — at $ 7 billion of internationally sold US dollar bonds and sukuk so far this year — has struggled to keep up with demand.
This is a recipe for tight pricing in the primary market, as investors submit large bids to make sure they are allocated a minimum amount of paper.
At the same time, the long-term outlook for bond markets worldwide has weakened this year because of higher US Treasury yields and strengthening equity markets.
These factors have convinced many institutions that the long bull market in bonds may have ended, making them reluctant to bid prices up beyond levels seen at issue.
One sign of the changed mood is that trading volumes in the Gulf’s secondary debt market, which surged last year, have declined since the start of this year, according to anecdotal evidence from traders.
There is no sign that the primary-secondary divergence will change any time soon. A dollar sukuk from Saudi Electricity Co. is due to price after roadshows soon, and because it is a rare dollar bond from Saudi Arabia, primary market demand may be extremely heavy. The company’s last international foray, in 2012, drew a $ 19 billion order book for a two-tranche, $ 1.75 billion deal.
“If the new issue comes to the market 50 bps cheap to the existing curve I will become very excited,” said Rasmala’s Bitcon.
“Unfortunately the chances of that are similar to the probability of snow in Dubai over Christmas.”


Iran sanctions shadow falls on smaller German banks

Updated 27 May 2018
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Iran sanctions shadow falls on smaller German banks

  • Some German companies plan to press on with Iran dealings
  • German exports to Iran rose 15.5 percent last year

Germany’s biggest lenders have shied away from business with Iran after past penalties for breaching US sanctions, but smaller banks have leapt on opportunities afforded by the nuclear deal rejected by Donald Trump.

There are just months to go until a November deadline issued by Washington after the US president abandoned a hard-fought agreement that loosened business restrictions on the Islamic Republic in exchange for Tehran giving up its pursuit of nuclear weapons.

But some firms plan to press on in their dealings with Iran despite the looming threat of penalties.

“We will continue to serve our clients,” for now, said Patrizia Melfi, a director at the “international competence center” (KCI) founded by six cooperative savings banks in the small town of Tuttlingen in southwest Germany.

The center, which supports companies operating in sensitive markets like Iran or Sudan, has seen demand “rising sharply in the last few years, from firms listed on the Dax (Germany’s index of blue-chip firms), from all over Germany and from Switzerland,” she added.

German exports to Iran have grown since the nuclear deal was signed in 2015, adding 15.5 percent last year to reach almost €2.6 billion ($3.0 billion) after 22-percent growth in 2016.

Such figures remain vanishingly small compared with Germany’s €111.5 billion in exports to the US — its top customer.

Nevertheless, the KCI will “wait and see what the sanctions look like” before turning away from Iran, Melfi said.

Already, firms dealing with Tehran must take great care not to fall foul of US restrictions.

Transactions are carried out in euros, and the KCI does not deal with businesses that have American citizens or green card resident holders on their boards.

What’s more, products sold to Iran cannot contain more than 10 percent of parts manufactured in the US.

One of the most important inputs for the business is “courage among our managers” given the high risks involved, Melfi said.

Germany’s two biggest banks, Deutsche Bank and Commerzbank, avoid Iran completely after being slapped with harsh fines in 2015 over their dealings there, with Deutsche alone paying $258 million in penalties.

DZ Bank, which operates as a central bank for more than 1,000 local co-op lenders, is withdrawing completely from payment services there, a spokesman told AFP.
That left KCI to seek out the German branch of Iranian state-owned bank Melli in Hamburg.

Even that linkage could break if Iran’s biggest business bank appears on a US list of barred businesses as it has before.

Meanwhile, among Germany’s roughly 390 Sparkasse savings banks, business with the regime is mostly limited to producing documents linked to export contracts.
“We will be looking even more closely at those” in the future, a person familiar with the trade told AFP.

Elsewhere in the German economy, the European-Iranian Trade Bank (EIH) founded in 1971 is another conduit to Tehran.

Also based in Hamburg, it for now remains “fully available to you with our products and services,” the bank assures clients on its website, although “business policy decisions by European banks may result in short term or medium term restrictions on payments.”

Neither does the Bundesbank (German central bank) believe that much has so far changed for business with Iran.

“Only the European Union’s sanctions regime will be decisive,” if and when it is changed, the institution told AFP.

Any payment involving an Iranian party would have to be approved by the Bundesbank if things return to their pre-January 2016 state.

German banking lobby group Kreditwirtschaft has called on Berlin and other EU nations to clarify their stance — and to make sure banks and their clients are “effectively protected against possible American sanctions.”

KCI’s Melfi said time is running out for EU governments to act.

“Many firms just want to stop anything with Iran, since they can’t calculate the risk of staying,” she noted.

On Friday for the first time since the Iran nuclear deal came into force in 2015, China, Russia, France, Britain and Germany gathered in Vienna — at Iran’s request — without the US, to discuss how to save the agreement.

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