Robust demand helps Gulf banks secure low yields
Dubai, October 4, 2012
Deals from two major banks this week have reopened the Gulf debt market after an extended summer lull, and highlighted the lower yields that investors in the region are settling for as liquidity continues to far outstrip supply.
Qatar Islamic Bank returned to the market on Wednesday after two years away with a $750 million, five-year sukuk at a profit rate of 2.5 percent. Order books for the sukuk were $6 billion.
This followed an oversubscribed conventional deal from Abu Dhabi's First Gulf Bank earlier in the week, which secured the bank's lowest-ever yield and coupon.
FGB was the first major Gulf borrower to issue after an extended summer lull, luring supply-starved investors.
"We expect that Gulf deals will continue to attract demand but not all issues will be a steal for investors," said Mark Watts, head of fixed income in the asset management group at National Bank of Abu Dhabi.
"Despite the performance or pricing of recent deals, the regional new issues are many times oversubscribed, clearly indicating a lot of pent-up demand for the regional credits."
For borrowers, historically low U.S. Treasury and deposit rates, as well as excess liquidity in the market, have helped to push yields lower. Also, the euro zone's debt crisis has shifted investor attention towards safe-haven credits.
"With a fragile global economy, a precarious and uncertain euro zone and the U.S. still in recovery mode, we can expect investors to start viewing the GCC (Gulf Cooperation Council) as a safe haven now more than ever, which will increase demand and lower yields," said Jason Kabel, head of fixed income at Bank of London and The Middle East.
"Of course if the supply of Gulf bonds and sukuk were to suddenly increase materially, then the shift in the supply/demand forces would cause yields to increase."
Both the FGB and QIB issues were supported in the secondary market and trading above par on Thursday, despite the tight pricing, in part because the borrowers chose to cap deal size, leaving a large level of demand unmet.
FGB priced its $650 million, five-year bond at a spread of 210 basis points over midswaps, in line with its existing sukuk issue that was sold in January and also matures in 2017.
Its latest bond was bid at 100.25 cents to the dollar on Thursday to yield 2.808 percent, according to Thomson Reuters data.
QIB's new sukuk, issued at 2.5 percent, was bid at 100.3 cents to the dollar and yielded 2.436 percent.
The bank's only other existing bond, another $750 million sukuk issued in 2010 at 3.856 percent and maturing in 2015 , was bid at 105.30 cents to the dollar to yield just 2.023 percent on Thursday morning.
Earlier this year, a big supply/demand imbalance for sukuk let issuers of those instruments price at yields significantly lower than they could achieve for conventional bonds. But recent market movements suggest this gap is narrowing because demand for conventional bonds has also become overwhelming.
Spreads on HSBC Nasdaq Dubai's GCC sukuk index have remained stable at about 215 bps in the last month, whereas spreads for the GCC conventional index have tightened 11 bps since Sept. 5.
In the last three months, spreads have tightened 16.4 percent on the conventional index and 14.5 percent for the sukuk index.
Comparing this week's two deals, "QIB, rated one notch below FGB at A, was able to price tighter because of the sukuk format and the rarity of Qatari names in the market," said Thomas Christie, fixed income sales trader at Rasmala Investment Bank in Dubai said.
But FGB's outstanding $500 million, five-year sukuk, issued earlier this year at a profit rate of 4.046 percent , still offers better value, he added.
"They are yielding more or less the same on a yield-to- maturity basis but the FGB matures 10 months before QIB," he noted. "Plus it's one notch better-rated, and you get a larger profit rate on the FGB."
The FGB sukuk was bid at 106.15 cents to the dollar on Thursday to yield 2.519 percent, about 8 bps more than the new QIB sukuk.
On Thursday, another Qatari lender, Qatar International Islamic Bank, announced a roadshow beginning Oct. 7 for a possible sukuk issue, a further sign that regional primary markets are open for business once again. – Reuters