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Market will struggle to absorb swarm of Middle East bonds
November 3, 2015 / 3:13 PM / 2 years ago

Market will struggle to absorb swarm of Middle East bonds

* Middle East primary market bursts into life

* Local liquidity and international interest questioned

* Time running out for issuers that waited to print

By Michael Turner

LONDON, Nov 3 (IFR) - The execution of a growing pipeline of deals from the Middle East is under jeopardy because of a toxic combination of reduced local liquidity and limited international, bankers have warned.

Jordan is to become the latest issuer from the region seeking to raise funds on Tuesday, following a US$1.6bn triple-tranche transaction for Lebanon last week.

While the greater pool of demand for sovereign issuers, which will soon likely be joined by the likes of Bahrain and possibly Oman, means these deals are unlikely to struggle, the story could be different for bank issuers.

“It’s not going to be a slam dunk for any of them,” said a London syndicate banker. “Local liquidity is very strained and I’ve had international accounts tell me that they are full on the Middle East, even though the issuers are all different.”

The banker said: “International investors have their Middle East pot, and once that’s gone, it’s gone.”

National Bank of Oman (NBO) is marketing an Additional Tier 1 while Gulf Investment Corporation and Commercial Bank of Dubai wants to sell new senior paper.

Although sovereign and senior and subordinated bank trades should go to different investor bases, syndicate bankers still warn that there could be winners and losers in the latest batch of potential transactions.

Sukuk have proved a success in recent weeks with three deals priced in the Gulf. Conventional deals, which unlike sukuk do not have as dedicated an investor base, face a tougher ride ahead.

A source close to CBD, which is due to meet fixed income investors from November 5, said that the bank’s deal might not come next week, despite the issuer having a decent following among the investor community.

“They would make sure that a good number of key investors are lined up,” the source said. “A concession of 25bp over perceived fair value would maybe be okay, but not 50bp to 75bp over.”

CBD has a US$500m May 2018 outstanding, according to Thomson Reuters. That note is trading at a Z-spread of 184bp.

Citigroup, ING, JP Morgan, National Bank of Abu Dhabi, Natixis and Standard Chartered are running that trade.

The CBD treasury official responsible for the deal was unavailable to comment.

INTERNATIONAL WORRIES, LOCAL CAUSES

Worries about the international bid have been brought to the fore by the collapsing regional demand for Middle East bonds.

A failed bond from Abu Dhabi Commercial Bank has become the poster-child of liquidity worries in the region. The deal was pulled in September after announcing initial price thoughts, with sources close to the trade blaming minimal local interest .

“There has been a general cut in liquidity in the region,” said another syndicate banker.

The liquidity drain out of Middle East banks, which make up the bulk of new issuance buyers in the Gulf, is becoming worrying.

National Bank of Abu Dhabi said at the end of October that government deposits dropped by US$13bn-equivalent in the last 12 months. Governments across the Gulf are withdrawing funds from their banking system to shore up economies against the pressures of oil at less than US$50 a barrel.

Another syndicate banker added that Gulf banks are increasingly turning to the regional repo market to finance themselves, a sure sign that banks need cash, but bond issuance is considered risky.

“The Middle East has been under-supplied, but it’s tricky,” said a bond banker. “[The primary market] is not going to be able to go full steam.”

That will not stop even more issuers from trying, however.

“There are only five weeks left to issue before the end of the year,” said a third syndicate banker. “People that have been holding off are being pushed to print.” (Reporting by Michael Turner; edited by Sudip Roy, Helene Durand)

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