LONDON, 2 November 2004 — The Gulf bond market, a late developer in the longer term debt market, is set to boom as the increased sophistication of the banking sector and finance departments of GCC companies has encouraged them to move their funding from bank loans to longer term debt. According to Trowers & Hamlins, the City-based international law firm which is very active in the Middle East markets, the boom is due to several factors including the increase in oil prices which has been one of the key drivers of demand for debt from the Gulf region; and improved regulation of the financial sector.

“Regulation in the Gulf region is moving toward a greater appreciation of, and familiarity with commercial realities. It’s a much better balance between regulation and facilitation. As the red tape burden has fallen, the costs of getting these bond issues done has tumbled,” stresses Andrew Rae, partner at Trowers & Hamlins.

However, the rapid growth of the Gulf bond market, warns Rae, will be dependent on a clean record for bond repayments, although corporate governance is improving and the outlook is positive. The GCC corporate bond issuance during the first nine months of 2004 have totaled $3,013.5 million, of which $2,775 million accounted for conventional bond issuances and $238.5 for Islamic bond (Sukuk) issuances.

This compared with $1,276.2 million of bond issuances in the GCC in 2003, of which $754 million accounted for conventional bonds issuances and Sukuk accounted for $522.2 million, respectively. These figures do not account for sovereign-backed bonds and Sukuk. For instance, to date Bahrain has issued $1.3 billion worth of Sukuk Al-Ijara; while Qatar has issued a $700 million issuance. The Sukuk market in some respects is outpacing the conventional bond market. Currently, there are mandates for five Sukuk issuances totaling $1,232.7 million, of which the $750 million Sukuk in the process of being issued by the Dubai’s Department of Civil Aviation (DCA) will be the single largest one out of the Middle East region. The proceeds will be used to fund the expansion of Dubai International Airport.

This compared with the single largest conventional bond of $665 million by a GCC entity - a project bond issued in 2004 by Qatar’s Ras Laffan Liquefied Natural Gas Company. There were two other conventional bond issuances of $500 million each in 2004 - the Emirates Airlines corporate bond and Emirates Bank International’s Emirates Medium Term Notes issuance.

The latest Sukuk issuance to close is the one issued by Bahrain-based First Islamic Investment Bank, which increased its net profit to $44.8 million at end 2003, and has an Islamic real estate and direct acquisitions portfolio with a total value of almost $6.0bn, primarily in the US, UK, and the EU.

As expected, First Islamic successfully closed the second Sukuk in its FIRSAN series at the beginning of this month. The EUR75m Sukuk issuance, managed by the Bahrain-based Liquidity Management Center (LMC), and known as First Islamic Registered Aman Euro Notes (Euro FIRSAN), was oversubscribed by EUR25m.

The initial response to the Sukuk issuance from investors was so positive that First Islamic decided to increase the amount from EUR50m to EUR75m. According to Hussein Al Meeza, Chairman of LMC, “the strength of First Islamic and the investment opportunities it offers are no better reflected than by the impressive investor response, which saw the size of the offering increase from an initial EUR50m to EUR75m in order to accommodate strong investor demand.”

The rapidly-increasing bond market, coupled with a shift to longer term debt and the high oil prices and resultant increased liquidity, has boosted confidence amongst foreign investors about the ability of the GCC regional economy to enable borrowers to service their debt.

Trowers and Hamlins’ Andrew Rae maintains that “foreign investors are becoming a bigger percentage of this market. They have become more knowledgeable and discerning regarding country to country differences within the region. Foreign investors are looking at corporate issuers, not just sovereign debt and are increasingly comfortable with the fastest-growing area of bonds issuance — Shariah-compliant Sukuk.”