Six Arab governments (Lebanon, Egypt, Qatar, Tunisia, Oman and Morocco) have so far resorted to borrowing in the international bond market, and the total amount of issues outstanding by the end of 2001 was close to $11 billion, with Lebanon accounting for more than half of that. Arab financial institutions and corporations have so far shied away from tapping the Eurobond market, with only six issues coming to the market in the past few years. The $450 million landmark issue by the National Bank of Kuwait (NBK) of February 2002 sets an important regional benchmark for future corporate debt issues from the region. We expect increasingly more credit worthy corporates to borrow in the international bond market, benefiting from lower competing supply and the increased demand for higher spreads expected on bond issues from the region.
This year is likely to be the year for smaller corporates, many could be first time issuers in the Eurobond market, driven by higher demand from investors and lower supply from traditional borrowers. With the end of the cycle of monetary easing in the US and Europe, putting yields on government and highly rated corporate bonds on a declining trend, investors will consider putting more money in bonds issued by lower rated corporates whose credit rating is likely to improve as the world economy continues to pick up momentum.
International corporate bond issuance in 2001 was a massive 1,200 issues amounting to $270 billion, compared to 1,058 issues valued at $200 billion in 2000. Supply of corporate bonds this year in the Eurodollar market is estimated by Citigroup to be about 15 percent-20 percent less than in 2001. Last year, the US dollar dominated the main currency of issuance accounting for over 44 percent of total international volumes, with the euro responsible for 40 percent, sterling 9 percent and the yen 7 percent. It was the Telecom and automotive sectors that dominated corporate international primary issuance last year with 30 percent and 22 percent respectively of the total. These sectors are not expected to issue anything near the same scale in 2002.
On the demand side, we expect the high levels of liquidity to be aggressively invested in new corporate bonds, especially those issued by credit worthy borrowers. To attain higher yields investors would be moving from shorter maturities, where both dollar and euro interest rates are likely to stay in low territories, to longer term issues and from government bonds to lower rated corporate issues which are likely to benefit from the economic upturn. Investors are also becoming less risk averse, with more weight given to corporate issues from the emerging countries.
The past three years have seen a “decoupling” of emerging markets, and investors now see them as a separate asset classes. For example Argentine bonds, which had a 22 percent weighting in the JP Morgan Emerging Market Bond Index plummeted by 67 percent in 2001, yet the 16 other emerging markets that the index tracks all rose, from a 5.5 percent gain for Venezuela to 55.8 percent for Russia. Mexico and Poland which are anchored to industrialized partners such as the US and Germany tend to have lower yields than Brazil, Russia, Turkey, Egypt and the Philippines, however sovereign issues from these countries look quite promising this year.
NBK’s inaugural Eurobond issue this year created the first international corporate bond issued from Kuwait and the third from the Gulf after the two issues of Qatar’s Ras Laffan Liquid Natural Gas Company, that came to the market in 1996. In 1995, the Jordan Telecommunication Company issued $50 million Eurobond that was followed in 1997 by Jordan Phosphate Mines Company (JPMC) with a $100 million in international bonds. JPMC has issued last week a $45.9 million Eurobonds maturing in June 2005 as part of refinancing the maturing existing bonds. The Egyptian conglomerate, Lakah Group went last year into default on its $100 million Eurobond that matures in 2004. Qatar’s Ras Laffan issued two Eurobond tranches in 1996, an $800 million tranche that matures in 2014 at a fixed coupon of 8.294 percent and a $400 million tranche maturing in 2006 at a fixed coupon of 7.628. The two issues were rated by Moody’s at Baa2.
For Arab corporates to be able to issue Eurobonds they need to be rated and this requires a high level of financial reporting and transparency close to international standards. By tapping the international bond market, Arab corporates will be able to diversify their sources of funds, tap a wider base of investors and reduce their dependence on bank lending. The bonds will also increase the duration of foreign currency funding for these institutions. NBK’s $450 million Eurobond sets an important regional benchmark for future international debt issues from corporates in the region. The issue was priced at LIBOR +25 basis points because of its Moody’s A2 credit rating, two notches above the sovereign ceiling of the State of Kuwait (Baa1). NBK has significant international exposure, a large asset base, strong earnings and evidence of durability in periods of crisis. The bank has always been interested in tapping the international bond markets to diversify its sources of funds and increase the duration of its foreign currency liabilities. However, rating agencies would not assign a rating to a borrower that is higher than the sovereign rating and therefore it was not economical for NBK to issue bonds.
In June 2001, Moody’s announced a new methodology regarding the country ceiling policy. This methodology is based on the recent experience of lower default rates on bonds issued in countries where the country later experienced debt servicing difficulties. The methodology takes into account government behavior in recent crisis situations-particularly in Ecuador, Pakistan, Russia, Indonesia and the Ukraine — which has shown that governments in default may choose to allow foreign currency payments on some favored classes of obligations. With this new policy, the ability of a borrower to pierce the country ceiling is based on three factors: The creditworthiness of the issuer (including external support mechanisms), the probability that there will not be a generalized moratorium in the event of default by the government and ability of the borrower to have access to sources of foreign exchange, conditions that NBK has fulfilled.
While the NBK Eurobond was the first in the Arab region to be rated above the country ceiling where the bank is domiciled, it may not be the last. The change in Moody’s international rating methodology that has permitted this rating would allow other corporates and financial institutions in the region to follow suit. Examples of such corporates and financial institutions include from Jordan the Arab Bank and Jordan Telecom, from Saudi Arabia SABIC and the Saudi American Bank, from Qatar Q-tel and Qatar National Bank, from Bahrain Investcorp, Arab Banking Corporation and Gulf International Bank and from Kuwait Gulf Investment Corporation and the Arab Fund. Emirates Bank International from Dubai has already indicated that it is going to issue a $300 million bond in the first half this year. There is a good appetite in the market for Eurobonds issued by credit worthy corporates in the Arab region. Investors in these bonds will be rewarded with higher prices (capital gain) on top of the interest coupon that these bonds pay which tends to be slightly higher than interest paid on issues from similarly rated companies in the West.
(The author is chief executive officer at Jordinvest)