Regulatory reforms encourage more listings and trades

The development of a vibrant primary and secondary debt market in Abu Dhabi and the wider UAE would bring manifold benefits, acting as an alternative source of funding for the emirate’s growing companies that presently rely on lending by banks. It would also provide a welcome boost to the asset management industry by expanding the number of financial instruments available to Abu Dhabi’s large and financially savvy investment community. However, the lack of sovereign issuances in recent years has hindered the growth of the domestic debt market.

One method of countering this challenge is the introduction of a government debt programme to establish a yield curve by which corporate issuers might reference their own offerings. While the financial community awaits development in this regard, both the national and emirate-level authorities have made a considerable effort over the past year to boost the nascent debt market.

Step Forward

The first step came in June 2014 and was aimed at encouraging the listing of bonds on the Abu Dhabi Exchange (ADX). For many years the emirate’s exchange hosted just a single corporate bond – the National Bank of Abu Dhabi (NBAD) Subordinated Convertible Notes, dating from 2006 – and traded values have been low relative to traded equities. According to ADX data, bond trading activity accounted for Dh303.9m ($82.7m) of the nearly Dh85bn ($23.1bn) in securities traded in 2013.

In order to encourage more listings ADX signed an agreement with NBAD whereby the emirate’s principal bank will act as the exchange’s account operator, with settlement and clearing to be carried out by NBAD through ADX’s account at Euroclear. The bank will effectively act as a window for investors that wish to trade or hold bonds through ADX without having to hold a Euroclear account themselves.

Speaking at the signing ceremony, ADX’s CEO, Rashed Al Balooshi, described the introduction of the new process as the removal of “yet another reason for companies and institutions to look elsewhere for raising capital”.

National Action

ADX’s efforts were further aided at the national level in September 2014, when the Securities and Commodities Authority (SCA) met with potential issuers and financial firms in both Abu Dhabi and Dubai to outline new rules designed to make it faster and cheaper to offer and trade in conventional and Islamic bonds.

According to the new regulatory regime, the minimum issue size has been reduced from Dh50m ($13.6m) to Dh10m ($2.7m), with issuers of debt instruments henceforth required to publish financial statements on an annual basis, as opposed to quarterly. The SCA has also shortened the approval time for issuance applications to five days.

In October 2014 ADX announced a development in the debt market with the inaugural listing of a government bond on the exchange. The $1.5bn listing, with a maturity date in 2019, has been established by the Abu Dhabi Department of Finance (DoF) as a dual-listed instrument, with a presence on both ADX and the London Stock Exchange.

Speaking at the listing ceremony, Mohammed Sultan bin Ghannoum Al Hameli, director-general of the DoF, stated, “The dual listing of the bonds will help to enhance the investment exposure of the local markets and to reinforce Abu Dhabi’s position as a regional and international financial centre able to attract investment and provide investors with diverse options in the securities and bond markets.”

The NBAD Subordinated Convertible Notes has therefore been joined by a second listed bond – a significant step in the development of the emirate’s capital markets. Thanks to these developments, the year 2014 has seen the most determined and concerted efforts by authorities at the emirate and national level to boost the bond market in recent memory. In the year ahead the financial community will have an opportunity to gauge their success.

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The Report: Abu Dhabi 2015

Capital Markets chapter from The Report: Abu Dhabi 2015

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