Abu Dhabi: Seeking bonds abroad

With investor demand for Islamic bonds growing, Abu Dhabi-based businesses are increasingly turning to the sukuk market to finance their activities, with four companies since November 2011 having issued sharia-compliant debt instruments. Meanwhile, the first three months of 2012 saw two major conventional bond issuances from Dolphin Energy and the National Bank of Abu Dhabi (NBAD). While the debt market looks healthy – particularly given the context of a challenging global economic climate – one factor that could increase activity in the fixed-income market would be a bond sale from the Abu Dhabi government, which has not issued sovereign debt since 2009.

Following a quiet period in the UAE debt markets, in November 2011 two banks – Abu Dhabi Commercial Bank (ADCB) and Abu Dhabi Islamic Bank (ADIB) – issued sukuks. ADCB, the second-largest lender in the emirate as measured by assets, raised $500m from its five-year Islamic bond, its first foray into the sukuk market, at a profit rate of 4.07%. This was followed shortly by a $500m, five-year sukuk priced at 3.78% from ADIB, the lender’s third issuance of a sharia-compliant bond.

Then in January 2012, First Gulf Bank (FGB), the third-largest lender in Abu Dhabi, sold a $500m sukuk, pricing it at 4.05%. According to a statement by the bank at the time of the sale, the proceeds from the five-year instrument would be used to fund growth of its sharia-complaint loan book and for Islamic general corporate purposes. This followed a July 2011 $650m, five-year sukuk from FGB, which was six times oversubscribed and attracted investors from the Middle East (46%), Europe (24%), Asia (24%) and the US (6%).

Gulf-based businesses are increasingly targeting Asian investors when it comes to bond sales, particularly in the Malaysian market, as they look to diversify away from dollar financing. In February 2012, the Abu Dhabi National Energy Company (TAQA) announced that it had raised RM650m ($211.64m) from the sale of a Malaysian ringgit-denominated sukuk. The 10-year Islamic bond, priced at 4.65%, was as part of a larger RM3.5bn ($1.14bn) debt programme that TAQA established in November 2011.

Malaysia represents an appealing source of alternative financing, according to a public statement by Stephen Kersley, the CFO of TAQA. “This successful transaction opens up a new market and debt structure for TAQA. The significant demand, attractive pricing and speed of turnaround from the Malaysian market, enhances our future financing flexibility and underlines the confidence of global markets in our business,” he said.

Ringitt-denominated Islamic bonds account for the majority of sukuks on a global basis, with sales in 2011 amounting to $24.6bn, double the previous year’s total, according to Bloomberg. By comparison, the total sukuk market reached $36.3bn in 2011.

TAQA was the first non-financial institution from Abu Dhabi – and indeed the larger Middle East and North Africa region – to float a sukuk in the Malaysian currency. Prior to TAQA, in 2010 NBAD sold two Islamic bonds with total value of RM1bn ($325.61m). But Abu Dhabi businesses are not limiting their Malaysian-denominated bond issuances to sukuk: in 2010 ADCB floated its first ringgit bond, a five-year conventional instrument priced at 5.2%. In April 2012 ADCB returned to the Malaysian market, again for a conventional bond, this time with an RM310m ($100.94m), five-year bond with a coupon of 4.3%.

However, the largest conventional bond issuance of the first part of 2012 was from Dolphin Energy. In February, the majority-state-owned firm sold a $1bn bond, followed by an additional $300m tap bond due to strong investor demand. The two bonds mature in December 2021 and yield 5.5%. Then in March, NBAD offered a $750m five-year bond carrying a coupon of 3.25%.

One factor that could boost activity in Abu Dhabi’s fixed-income market would be new issuance of sovereign debt. The emirate’s government last turned to the markets in April 2009, selling a five-year $3bn bond. While the government has subsequently indicated that it might do so again – most recently in June 2011 when an official from Abu Dhabi’s debt management office said that the emirate planned to issue a bond within six to 12 months – these plans have yet to be realised.

Nonetheless, a number of Abu Dhabi’s businesses have been successful in borrowing on the global debt market in recent months, with these bonds well-received by investors who are attracted by good credit ratings and a robust local economy. Moreover, the move to issue ringgit-denominated bonds also signals that local firms are willing to be creative when it comes to debt structuring and finding new investors.

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