Gulf sukuk: Order books ‘probably inflated’

Updated 22 March 2013

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.”


France ready to take Trump’s tariff threat to WTO

Updated 08 December 2019

France ready to take Trump’s tariff threat to WTO

  • Macron government will discuss a global digital tax with Washington at the OECD, says finance minister

PARIS: France is ready to go to the World Trade Organization to challenge US President Donald Trump’s threat to put tariffs on French goods in a row over a French tax on internet companies, its finance minister said on Sunday.

“We are ready to take this to an international court, notably the WTO, because the national tax on digital companies touches US companies in the same way as EU or French companies or Chinese. It is not discriminatory,” Finance Minister Bruno Le Maire told France 3 television. Paris has long complained about US digital companies not paying enough tax on revenues earned in France.

In July, the French government decided to apply a 3 percent levy on revenue from digital services earned in France by firms with more than €25 million in French revenue and €750 million ($845 million) worldwide. It is due to kick in retroactively from the start of 2019.

Washington is threatening to retaliate with heavy duties on imports of French cheeses and luxury handbags, but France and the EU say they are ready to retaliate in turn if Trump carries out the threat. Le Maire said France was willing to discuss a global digital tax with the US at the Organization for Economic Cooperation and Development (OECD), but that such a tax could not be optional for internet companies.

“If there is agreement at the OECD, all the better, then we will finally have a global digital tax. If there is no agreement at OECD level, we will restart talks at EU level,” Le Maire said.

He added that new EU Commissioner for Economy Paolo Gentiloni had already proposed to restart such talks.

France pushed ahead with its digital tax after EU member states, under the previous executive European Commission, failed to agree on a levy valid across the bloc after opposition from Ireland, Denmark, Sweden and Finland.

The new European Commission assumed office on Dec. 1.