The opening months of 2012 were characterised by renewed optimism throughout GCC debt markets, as a series of well-received bond issuances suggested that the period of quiescence that followed the global economic crisis had reached its end. Regional issuers moved to take advantage of favourable funding costs and increased liquidity in the market, and Abu Dhabi-based firms played a sizeable part in issuing activity, making the UAE the largest source of corporate bond issuances in the first quarter of 2012, according to global consultancy PwC.
NEW BONDS: First came a string of sukuks, or sharia-compliant issuances (see Islamic Financial Services chapter). In November 2011 two of the emirate’s largest lenders, Abu Dhabi Commercial Bank and Abu Dhabi Islamic Bank, went to the market with sukuk offerings, each worth $500m and with a five-year tenor. First Gulf Bank (FGB), the third-largest lender in Abu Dhabi, followed them in January 2012, also with a five-year, $500m sukuk issuance, and priced at a similar 4.05%.
The sale was the second of this scale for FGB in a year, and reflects the growing need for Abu Dhabi’s lenders to fund the expansion of the sharia-compliant loan books that account for much of the banking sector’s current growth. Gulf-based businesses have also shown a desire to diversify away from dollar financing in recent years, and the February 2012 sukuk issuance by the Abu Dhabi National Energy Company reinforced this trend. Its RM650m ($209m), 10-year sukuk priced at 4.65% was the latest phase of a debt programme that it has directed at the Malaysian market. However, the largest debt issuance in early 2012 to originate from Abu Dhabi was the $1bn bond from Dolphin Energy, which was so popular that the majority government-owned company issued a subsequent tap bond worth $300m. Both bonds mature in December 2021 and yield 5%. The following month, the National Bank of Abu Dhabi (NBAD) the emirate’s largest lender by assets, made another issuance that rounded out the emirate’s first-half 2012 debt market activity. The $750m offering carried a coupon of 3.25% and matures in 2017. NBAD sold another $750m worth of bonds in August with a maturity date of 2019.
SECONDARY TRADING: The uptick in debt issuances originating from the domestic market in 2012 has revived a public discourse concerning a secondary debt market on the Abu Dhabi Securities Exchange (ADX). Currently, the vast majority of bond and sukuk trading is conducted through over-the-counter deals, whereby investors transact directly with brokers or banks’ trading floors. The ADX, however, has well-established regulations for listing debt instruments, as well as the electronic platform necessary to host them. “The law is there, the platform is there – now it is just a matter of persuading companies to list,” Khalid Khalfan Al Suwaidi, the head of finance and management affairs at the ADX, told OBG. The ADX has successfully listed bonds in the past, although these have been convertible and linked to equity. This is the case with the sole bond listed on the market as of November 2012, a Dh2.5bn ($680.8m) subordinated convertible note issued by NBAD in 2006. The listing of a pure fixed-income instrument would represent a significant step forward towards a viable secondary market on the ADX.
One development that could boost the fixed-income market would be a new issuance of government debt. The emirate’s government last turned to the market in April 2009, when it successfully offered a five-year, $3bn bond. Combined with the five-year sovereign issuances of 2007 and 2009, the most recent government debt offering has gone some way toward creating a yield curve that might be usefully added to in the current climate. In 2011 an official from Abu Dhabi’s Debt Management Office (DMO) – the body charged with coordinating the debt issuances of the emirate’s government and quasi-government bodies – announced that the emirate planned to issue a bond in the next six to 12 months. Such a move by the Abu Dhabi government would be warmly welcomed by a financial community that is keen to establish a secondary debt market.
SOVEREIGN ISSUES: While a sovereign issue looked unlikely in the final quarter of 2012, Abu Dhabi continued to maintain an investor relations programme, which saw it stage roadshows in the US, Beijing, Hong Kong and Singapore over the course of the year. A sustained effort to update and engage with investors and potential investors through events organised with multinationals such as HSBC and Bank of America Merrill Lynch has become more of a priority as a drive to increase transparency in relation to debt issuance and debt issuing bodies gathers momentum. Public announcements from the government towards the close of 2012 suggested that when a sovereign issue is eventually made, it may be dollar denominated.
“There might be some plans for next year, but this is not imminent,” Saeed Almazrouei, head of the debt management office at the emirate’s finance department told Bloomberg in November 2012.
Beyond a sovereign issuance, further potential for bond market activity can be found in the government-related entities (GREs), such as Mubadala Development Company, International Petroleum Investment Company (IPIC), Abu Dhabi National Energy Company, and the Tourism Development and Investment Company (TDIC), which have all increased public borrowing in recent years as part of the emirate’s long-term ambition to diversify its economy away from reliance on hydrocarbons.
Abu Dhabi’s last GRE issuance came in February 2012, when Dolphin Energy, which is majority-owned by state fund Mubadala, raised a total of some $1.3bn. Abu Dhabi Commercial Bank, BNP Paribas, Mitsubishi UFJ, Royal Bank of Scotland and Société Générale acted as bookmakers for the offering, which had a 10-year tenure and was privately placed at 5.5%. According to the company’s investor presentation, proceeds from the bond issue will be used to refinance its existing bank debt and to pay a distribution to Dolphin’s shareholders.
According to the IMF, total GRE debt in the UAE stood at approximately $185bn at the close of 2011, with Abu Dhabi accounting for some 54% of the total. As for the question of the future GRE bond pipeline, here again the DMO will play a significant role in the manner and speed with which the debt offerings will come to market.
Although the body does not have the power to sanction or reject a GRE’s decision stage a bond issuance, the DMO’s three-fold mandate grants it significant influence in the process. Its primary function regarding debt management is to coordinate between the various GREs on the question of bond issuance, meeting with them once a month to ensure that potential issuance bottlenecks are avoided and that economic data offered to investors is timely and accurate. It is also mandated with a risk management role, which sees assessing the liabilities of GREs with particular regard to factors such as interest rate risk, currency risk and maturity risk.
The third element of the DMO’s mandate concerns stakeholder relations. While its activities in this regard are limited to sovereign debt, its communication with rating agencies, its roadshows and its regular dissemination of data all indirectly influence the messaging related to the broader field of GRE debt offerings.
CHECKING POWER: One thing the DMO cannot do is explicitly guarantee GRE debt. To date, however, investors have been content with the implicit guarantee by a government with the credit to back it up. Further clarification regarding the extent of government backing in relation to some GRE debt came in the second half of 2012, with the delivery of a document to state-owned entities which more clearly defined the DMO’s role as the national centralised debt mechanism, and established some restraints on borrowing by quasi-sovereign bodies.
The document explains that the government will only bear responsibility for debt that is formally guaranteed by the Executive Council or Abu Dhabi law if the borrower is unable to meet its obligations. Moreover, those GREs that wish to obtain an Executive Council guarantee must comply with a robust set of standards and report their performance against them to the Department of Finance every six months – although the Executive Council reserves the right to issue a guarantee for GRE debt, even if the body does not formally meet the criteria. The document does not deviate in tone from a number of earlier statements offering, in broad terms, state support for the four major state-owned enterprises (Mubadala, IPIC, the Abu Dhabi National Energy Company and TDIC). It does, however, represent a clarification of the function of the DMO and serves to underscore the UAE’s commitment to good governance procedures in relation to GRE debt issuance.