* Foreign investors traditionally focused on Gulf sovereign
* But surge of sovereign issues now luring new money to
* Building of yield curve makes pricing more acceptable
* Allocations to National Bank of Kuwait show heavy U.S.
* Gulf sees more 144A, long-dated issues
By Davide Barbuscia
DUBAI, June 1 The Gulf's market in international
bonds is deepening as foreign investors move beyond sovereign
debt to issues from banks and corporations - a shift that could
change the way some issuers choose to structure their bonds.
Traditionally, foreign investors in Gulf debt have focused
almost entirely on sovereign bonds because of their greater
safety and liquidity.
But a surge of sovereign issuance in the past 12 months, as
Gulf governments cover budget deficits caused by low oil prices,
is changing that pattern. It has put the region on the map for
some foreign institutions, making them boost allocations to the
six Gulf Cooperation Council states.
Institutions that fail to satisfy their appetite for GCC
debt entirely with sovereign bonds look a few notches down the
credit rating curve at bank and corporate issuers.
Meanwhile, expanded sovereign issuance has created a
complete yield curve for the region, making it easier for banks
and companies to price bonds at levels which a range of
“This is a market that attracts both investment grade and
emerging market investors,” said Hani Deaibes, head of Middle
East debt capital markets at JPMorgan.
“What is happening is that the large issuances from
sovereigns have made this market more relevant to investors.
This has increased the interest in corporates and banks from the
region. There’s more understanding of the market."
In 2016, GCC bond volumes totalled a record $69 billion,
more than double the usual level since the mid-2000s, Thomson
Reuters data shows. Over $40 billion has been issued so far this
Jumbo sovereign deals include Saudi Arabia’s $17.5 billion
debut international bond last year, the largest issued in
emerging markets, plus an $8 billion bond from Kuwait and Saudi
Arabia’s $9 billion international sukuk, or Islamic bond, this
Allocation statistics for at least one recent Gulf issuer
suggest the balance of demand by geography and investor type is
A $750 million senior secured bond issued in May by Kuwait’s
largest commercial lender, National Bank of Kuwait,
was mostly bought by U.S.-based investors. Some 57 percent of
the paper went to them, followed by Middle East investors with
26 percent, Europe with 13 percent and Asia with 4 percent.
By contrast, 43 percent of a $700 million bond issued by NBK
in 2015 went to Middle East investors; U.S. buyers took only 2
“From an emerging markets perspective this region has become
more relevant, in particular in the U.S., simply by virtue of
the sheer volumes issued since last year,” said Iman Abdel
Khalek, Citigroup's head of regional debt capital markets.
“NBK has been the first bank to take advantage of this. The
pricing outcome was exceptional and was a direct outcome of the
bid from U.S. investors, who also bought the Kuwait sovereign
bond earlier in the year.”
Bankers said Oman Electricity Transmission's $500 million
bond deal in May, and a $500 million bond issued by Qatari
telecommunications company Ooredoo in 2016, also attracted
unusually large demand from foreigners after issues by the
firms' respective governments.
NBK’s bond was its debut dollar issue under the 144A format,
which lets a non-U.S. issuer tap the U.S. market without
registering on a U.S. exchange.
To exploit higher U.S. investor demand, more 144A issues are
likely to occur in the Gulf, said Usman Ahmed, managing director
for investments at Dubai's Emirates NBD Asset Management.
GCC issuers have traditionally favoured five-year bonds but
some may start looking at seven or 10 years because foreign
investors have more appetite for longer maturities.
Apostolos Bantis, head of emerging market credit research at
Commerzbank, said the trickle of foreign demand to banks and
corporates was a sign of maturity in the GCC market.
“The build-up of the GCC sovereign bond curves is opening
the ground for more domestic corporates to come to the markets
at more favourable funding terms. While historically local GCC
investors were the main buyers of Middle East corporate and bank
bonds, the trend is changing."
(Editing by Andrew Torchia and Stephen Powell)