Corporates that tap debt markets can expect to meet healthy demand, due in part to the dearth of issuance compared with government-related firms and the prospect of high coupon rates, investors say.
Portfolio managers holding bonds issued by Kuwait Projects Company (KIPCO) last July have already made a cash return of about 11 percent on the investment. KIPCO is the biggest investment firm in Kuwait yet it offered its bond at an alluring 9.5 percent.
But in return corporates will have to be ready to open their books to scrutiny and cough up a hefty regional risk premium.
“There’s more refinancing needs in this region than anywhere else during 2011. We would have expected a lot more issuance out of the region, but that hasn’t happened yet,” said Steve Cook, head of Emerging Markets Corporate Bonds at PineBridge Investments, the asset management arm of AIG.
“Our understanding is that the pipeline of potential primary deals is large. It’s just a question of timing,” he added.
“If they (issuers) are realistic on pricing and provide a new-issue premium then the deals will likely see strong demand.”
Among firms, only property developer Emaar, builder of the world’s tallest tower, has managed to get a dollar-denominated deal away from the Gulf so far this year, timed just before the political unrest in the Middle East and North Africa.
But with spreads tighter than at any point in the last two years in Dubai and massive infrastructure and social development plans underway across the region, that is expected to change.
Bank lending remains sporadic at best and commitments from government to develop capital markets make bond issues a natural source of raising capital.
Gulf companies have been hesitant to tap global bond markets amid a volatile regional security situation and Dubai’s slow crawl out of its debt crisis.
Governments, state-owned entities and banks have fared better, but have issued opportunistically, including tapping liquidity pools in Malaysia and Switzerland to diversify their sources of funding.
Malaysia in particular appeals for its potential Islamic investor pool, while Swiss franc issues by several Gulf banks this year have provided access to cheaper funding.
The result has been that the Gulf accounted for just a tiny fraction of total emerging market corporate issuance of $69 billion in the first quarter.
Potential issuers are seen in sectors with concrete expansion plans such as retail, hospitality and tourism and banks are on the prowl for new fee-generating business.
“The deals will get done where there’s most stability,” said Andrew Dell, HSBC’s regional head for debt capital markets.
A top candidate is Majid Al Futtaim (MAF) Holding, named after its billionaire Emirati owner and sole franchisee of the French hypermarket chain Carrefour in the UAE.
After a noticeable lull, Dubai’s malls are teeming with residents and visitors and MAF Properties, owner and manager of some of the busiest malls in the region, has plans to spread its wings further afield.
A senior company official said in April it had obtained a rating as a first step toward a bond issue.
Corporate issuers, many of whom do not have credit ratings, will have little choice but to open up their books. State-linked issuers have the security of implicit or explicit guarantees.
“While increasing, the region still lags the developed world in terms of disclosure,” HSBC’s Dell said.
A lack of transparency and slow regulatory reforms on corporate governance and accounting standards have hampered the development of a mature corporate culture in the region.
“The regional unrest has delayed some, but not all, issuers from moving forward with the rating process,” said S&P corporate analyst Tommy Trask.
“There is a great need to term out debt amongst regional corporates.”
