U.A.E. Bond-Issuance Freeze Spurs Calls for Deeper Reform

The United Arab Emirates market regulator implemented measures in June to help ignite domestic debt sales. Since then not a single borrower has issued the bonds.

To spur sales, the country needs to increase sovereign issuance to provide a benchmark for other borrowers and ensure institutional demand for the debt by reforming pension and insurance funds, according to Abdul Kadir Hussain, who oversees about $1.2 billion as chief executive officer of Mashreq Capital DIFC Ltd.

Without a developed domestic bond market the U.A.E., the Arab world’s second-biggest economy, will leave borrowers with few alternatives to bank loans. As many as 15 mostly publicly-traded companies have expressed an interest in issuing bonds and sukuk since the rules were published, the country’s Securities and Commodities Authority, or SCA, said this week. That interest has yet to translate into firm sale plans.

“There is not that much demand from investors to hold dirham debt,” Manuel Almutawa, a Bahrain-based fixed income and equity analyst at Securities & Investment Co., said by phone yesterday. “Any issuance that occurs is likely to be small placements, bought by buy and hold investors and so the market would be very illiquid.”

Lack of Sales

Only one bond denominated in dirhams has been issued this year through yesterday, according to data compiled by Bloomberg. That was by Emirates NBD PJSC, the U.A.E.’s second-biggest bank by assets, in March. The Dubai government issued a sukuk in 2009 that raised 2.5 billion dirhams ($681 million), the data show.

SCA’s new rules for the first time treat sukuk and non-Shariah compliant debt separately, and have reduced the minimum size requirement for an issue to 10 million dirhams from 50 million dirhams. The approval period for sales was shortened and the requirement to have a credit rating was removed.

“The biggest jump-start could be getting insurance companies reform,” Mashreq Capital’s Hussain said. “If insurance companies were forced to put a certain percentage of their statutory capital and also a certain percentage of their premium income into bonds, specifically dirham bonds, that would create a huge pool of demand right away.”

There have been about $20 billion of bonds and sukuk issued by borrowers in the U.A.E. this year through yesterday, according to data compiled by Bloomberg. Debt has been issued in a variety of currencies including euros, yen, Swiss francs, Australian dollars, and British pounds. Emirates Telecommunications Corp. raised $4.3 billion in June, the biggest bond sale in the Middle East this year, to fund its acquisition of Maroc Telecom.

Lagging Behind

“The dirham market could be attractive to smaller companies whose business is more based around dirhams and who would have difficulty accessing the dollar market,” Almutawa said. “It’s also attractive for the government as its easier to repay local currency debt as the central bank can just print more money.”

The U.A.E. has a lot of catching up to do before domestic issuance rivals that of countries such as Malaysia and Saudi Arabia. There were about $126 billion of ringgit-denominated securities outstanding as of Oct. 15, and $30 billion of riyal-denominated debt,according to data compiled by Bloomberg. About $1.3 billion of dirham-denominated bonds were active.

“You need to have a proper structure in the market,” Hussain said. “A proper structure will come from having a proper domestic sovereign yield curve, and having proper institutional buy-side demand for that paper.”

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