* Gulf bonds rally on global "risk on" mode
* Bond pipeline strong, borrowers eye window to issue
* Islamic bonds may appeal after outperformance
By Rachna Uppal
DUBAI, Oct 13 After two months of inactivity due
to the euro zone debt crisis and turmoil in global financial
markets, high-grade borrowers from the Gulf Arab region may be
close to resuming issuance.
There is a substantial number of bonds in the pipeline, and
a partial improvement of sentiment in global markets in the past
week -- although the euro zone crisis remains fundamentally
unresolved -- has helped Gulf spreads tighten dramatically.
The average yield on the HSBC Nasdaq Dubai GCC conventional
dollar bond index fell to 5.039 percent on Wednesday from 5.245
percent at the end of last week. Average spreads, calculated
over Libor, narrowed to 305.6 basis points from 345.6 bps. In
the week to Oct. 5, net outflows from emerging market bond funds
slowed to $1.4 billion from the previous week's $3.2 billion,
according to IFR Markets.
Abu Dhabi's Union National Bank held roadshows for
a potential bond in September but has so far refrained from
issuing. Dolphin Energy, Dubai-based mall developer Majid Al
Futtaim (MAF) Holding, and Tourism Development and Investment Co
(TDIC) met investors earlier this year but did not issue, citing
"Clearly it is not the market where low-quality issuers can
get anything done," but the situation is different for some
higher-quality issuers, said a London-based Middle East fixed
High-quality names still face higher spreads compared to
several months ago but this is partly due to a collapse of U.S.
Treasury yields , he noted. "In spread terms, they
get frustrated because it is not as tight as it was, but in
absolute yield terms people are still looking at levels that are
Several Gulf names have rallied to trade at near-par levels
during this week.
"If Europe remains quiet on the bad news front, we should
see this rally continue in the short term," said a regional
fixed income trader.
The Dubai government's 7.75 percent 2020 bond
was bid at 99.831 on Thursday morning to
yield about 7.776 percent, down from 8.468 percent on Oct. 5.
Abu Dhabi investment fund Mubadala Development Co's
5.75 percent 2014 maturity was bid at around 107.549
on Thursday afternoon to yield about 2.667 percent, from 2.953
percent on Oct. 10.
"You can price credit risk but not event risk, and that is
the main reason why the volume of new issues is low," said an
Abu Dhabi-based trader.
"If the stability that we saw this week continues, then the
climate will be better for new issues, and then we can talk of
spreads and how much premium issuers need to pay to raise
If issuance does resume, however, it is likely to be gradual
because high-grade credits do not appear desperate for money,
"At the end of the day, the most highly rated credits are
the ones that tend to have the least need for finance," said
Nicholas Stadtmiller, fixed income analyst at Emirates NBD.
"Entities that can raise funds easily either don't need or don't
want them, and those would like to raise money have a harder
time getting it."
Some traders speculate that Islamic bonds, or sukuk, could
be among the first bonds issued after the drought. Sukuk held up
relatively well in the secondary market during the recent
volatility, partly because investors tend to buy them to hold
for maturity rather than for trading. This could prompt both
borrowers and investors to see the sukuk market as a relatively
low-risk place for issuance.
"The sukuk markets are new and not nearly as liquid as
developed debt markets. That creates opportunity," said Akram
Annous, MENA strategist at Al Mal Capital in Dubai.
Government-owned Abu Dhabi National Energy Co (TAQA)
is seeking regulatory approval for a
ringgit-denominated benchmark sukuk, while Kuwait Finance
House's Turkish unit Kuveyt Turk Participation Bank is
on the road this week in Asia, the Middle East and Europe for a
potential Islamic issue.
Average spreads for GCC sukuk on the Nasdaq Dubai dollar
sukuk index have narrowed to about 295 bps from over 320 bps at
the beginning of this month.
(Additional reporting by Martin Dokoupil and Mala Pancholia;
Editing by Andrew Torchia)