The Middle East’s biggest debt underwriter said bond sales by government-related companies in the Persian Gulf will pick up at the start of 2013 to support more than $1 trillion in planned spending.
There’s reason to be “optimistic” for sales by government-related enterprises at the start of next year, said Georges Elhedery, head of global markets for the Middle East and North Africa at HSBC Holdings Plc. Issuance this year by so-called GREs fell to about $9.9 billion from about $13 billion in 2011 and compared with $8 billion a year earlier, according to data compiled by Bloomberg.
“The first quarter of 2013 is going to be busy,” he said in an interview at his office in Dubai on Dec. 4. “It’s difficult to see beyond that.”
This year’s record $41 billion of debt sales in the six-nation Gulf Cooperation Council masked a decrease in sales by GREs, which “held back” from offering bonds, Elhedery said. The region’s corporate borrowing costs tumbled more than emerging-market peers this year, boosting the allure of debt amid state plans to build airports, sports facilities, refineries and museums.
The yield drop enabled government issuers in Saudi Arabia and Qatar to raise $4 billion each in this year’s largest global offerings of Islamic bonds, which pay returns to comply with the religion’s ban on interest. The Saudi aviation authority sought the funds for an airport as the kingdom pursues more than $500 billion of investments. Qatar plans to spend $130 billion before hosting the soccer World Cup in 2022.
Abu Dhabi, which holds most of the United Arab Emirates’ oil reserves, wants to reduce its reliance on crude sales by investing in metals and chemicals, as well as a cultural center with branches of the Guggenheim and Louvre. These spending programs will spur sales by GREs, which “haven’t issued the way they did last year and the year before,” Elhedery said.
Energy investor International Petroleum Investment Co., known as IPIC, raised $2.9 billion last month in the region’s biggest corporate offering this year. The Abu Dhabi-based company priced a euro-denominated tranche of notes to yield 2.375 percent, compared with 4.875 percent at a sale of similar maturities in 2011.
Abu Dhabi National Energy Co., the company known as Taqa which last month bought BP Plc’s stakes in North Sea fields for $1.1 billion, raised $2 billion of dollar-denominated debt last week.
The average yield on GCC company bonds tumbled 175 basis points, or 1.75 percentage points, in 2012 to 3.47 percent on Dec. 7, according to HSBC/Nasdaq Dubai’s GCC Conventional Corporate U.S. Dollar Bond Index. That compares with a 123 basis-point decline to 4.06 percent for JPMorgan Chase & Co.’s Corporate EMBI High-Grade Blended Yield index.
Private businesses in the Gulf may also turn to the bond market in greater numbers, Elhedery said. Majid Al Futtaim Holding LLC, a family-held operator of malls and hotels, raised $500 million from the sale of non-Islamic bonds in June, following a $400 million sukuk issuance five months earlier.
“Smaller privately owned corporates with strong, growing businesses and a story they can sell,” he said.
Another driver next year will be the region’s banks, which are trying to increase regulatory capital for expansion, Elhedery added. Abu Dhabi Islamic Bank PJSC last month raised $1 billion from the world’s first dollar-denominated Islamic bonds that don’t mature to lift its Tier-1 capital ratio, which helps protect depositors against unexpected losses.
Lenders including Qatar National Bank SAQ, the Middle East’s biggest, more than quadrupled bond sales this year to almost $14 billion as they seek to keep up with loan growth to private businesses of 14 percent in Qatar in August and 15 percent in Saudi Arabia in October, the highest in almost four years.
“Most banks are well capitalized, the difference is that many of these banks also have demanding growth targets,” Elhedery said. “If they want to pursue these targets, they have to address their capital structure.”
Still, state spending will be the key catalyst behind next year’s debt sales. The Abu Dhabi government, which aims to invest $500 billion through 2030, operates investment company Mubadala Development Co., which is investing in technology, health care and aerospace industries to acquire technical expertise and create jobs.
Tourism Development & Investment Co. plans to start the construction of the Louvre in the first quarter, before opening the museum in 2015, followed by the Guggenheim two years later. The yield on TDIC’s 4.949 percent Islamic notes due October 2014 declined 92 basis points this year to 1.92 percent today.
“We’re still optimistic on the pipeline,” Elhedery said. “There’s still growth and there’s still infrastructure investment so that’s naturally going to require debt.”