Gulf Bond Sales Approach 2008 Low as Risk Surges: Arab Credit

Bond sales from the Persian Gulf region have slumped to the lowest level since 2008 as the threat of another global recession fueled the steepest surge in the region’s credit risk in seven quarters.

Sovereign and company debt issuance in the six-nation Gulf Cooperation Council, which includes Saudi Arabia and the United Arab Emirates, have totaled $1.54 billion since June 30, the smallest amount since the last quarter of 2008, data compiled by Bloomberg show. The average cost of insuring the Middle East’s notes against default jumped 75 basis points in the period to 344 yesterday, headed for the biggest increase since the three months ended Dec. 31, 2009, according to data provider CMA.

Emerging-market bond funds saw the biggest capital outflows in more than two years in the week to Sept. 21, EPFR Global data show, as Europe’s debt crisis prompted investors to exit riskier assets. Last week, the Federal Reserve said there are “downside risks” to the U.S. economy and the International Monetary Fund cut its forecast for 2011 global growth to 4 percent from 4.3 percent. Abu Dhabi’s Tourism Development & Investment Co. and Dolphin Energy Ltd. deferred debt sales this quarter.

“A lot of issues have been delayed because of the volatility in the markets,” Ahmed Talhaoui, the Abu Dhabi-based head of investment and asset management at Royal Capital PJSC, said in an interview on Sept. 25. “And we would probably expect it to remain this way for the foreseeable future.”

Default Swaps

The cost to protect the bonds of Dubai, which received $20 billion in loans from Abu Dhabi in 2009 to avert defaults by state-owned firms, against nonpayment using credit-default swaps jumped 148 basis points this quarter to 488 on Sept. 27, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Swap prices for Abu Dhabi added 28 basis points to 123 and those for Saudi Arabia rose to as much as 131.

Borrowers in the GCC area have raised $11.8 billion from 26 debt issues so far this year, compared with $16 billion in the same period a year ago, Bloomberg data show. Total issuance across emerging markets climbed 10.5 percent this year to $578 billion, led by issuers from China, according to the figures.

The market for Persian-Gulf notes is unlikely to see “a meaningful pickup” in the coming months amid concern world growth is stalling, Gus Chehayeb, a Dubai-based associate director at the investment bank Exotix Ltd., said in an interview on Sept. 21. The current economic crisis may lead to a possible recession in the U.S. and Europe that may be hard to alleviate, according to Pacific Investment Management Co., the world’s biggest manager of bond funds.

“With the shocks emanating out of Europe and the U.S., there is much less appetite for risk,” Chehayeb said.

Alternative Funding

Unfavorable bond-market conditions are spurring Persian-Gulf nations to seek funding alternatives including bank loans as economic growth quickens, helped by higher earnings from oil exports. The World Bank last week lifted its 2011 growth estimate for the Middle East and North Africa to 4.1 percent from 3.6 percent. Crude prices have averaged 23 percent more this year from the same period of 2010, Bloomberg data show.

Majid Al Futtaim Holding LLC, the operator of Carrefour SA stores in the Middle East, shelved in July a plan to sell five-year bonds, opting instead to raise $1 billion in bank loans. Saudi Oger Ltd., a Riyadh-based construction, telecommunications and utility company, last month hired lenders to arrange $1.86 billion in loans. Dubai Holding LLC, one of the emirate’s three main state-owned holding companies, agreed with lenders in August to extend a $1.16 billion liability to December 2016.

“Look at Majid Al Futtaim, they pulled their bond issue and went to the loan market instead, so there is always a way around,” Royal Capital’s Talhaoui said.

Beating Emerging Markets

Persian Gulf bonds are still beating emerging-market debt this year as increased oil revenue supports regional economies. Members of the Organization of Petroleum Exporting Countries, led by Saudi Arabia and the U.A.E., will earn a record $1 trillion this year, according to the U.S. Energy Department.

Dollar notes from the GCC have returned 5.9 percent in 2011, according the HSBC/NASDAQ Dubai GCC US Dollar Sukuk/Bond Index. Emerging-market bonds worldwide have returned 3.1 percent so far this year, JPMorgan Chase & Co. data show.

“For the right credits from this region, namely the sovereigns, government-related entities and top-notch financials from Abu Dhabi and Qatar, there is still appetite out there,” Chavan Bhogaita, head of the markets strategy group at National Bank of Abu Dhabi PJSC, said in an interview Sept. 26. “GCC and selected emerging-market credits stack up better than many European ones in terms of risk and reward.”

Planned Bond Sales

International Petroleum Investment Co., an Abu Dhabi government-controlled energy investor, is the region’s biggest debt issuer this year, raising $4.37 billion in March to help pay for acquisitions. Dubai’s government raised $500 million in June to help bridge a budget deficit.

Union National Bank PJSC, the U.A.E. lender in which the governments of Abu Dhabi and Dubai both hold stakes, began meeting investors in the U.A.E. and Singapore this week as a prelude to a possible bond issue. Bahrain, which was rocked by protests led by its Shiite majority, plans to sell about $1 billion in Islamic bonds next month as the kingdom seeks to bridge its budget deficit. Qatar National Bank SAQ, Qatar International Islamic Bank and Abu Dhabi’s Al Hilal Bank are also planning sales.

Ten-year U.S. Treasury yields have dropped more than 1.10 percentage points in the past three months, reaching a record low of 1.6714 percent on Sept. 23 as investors sought refuge in U.S. government debt from the worldwide economic slump. Credit-default swaps on French and German government debt rose to records on Sept. 26 as policy makers struggled to resolve Europe’s debt crisis.

With “more negative news coming one after another,” it’s difficult to predict the flow of new bond issues going forward, National Bank of Abu Dhabi’s Bhogaita said.

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