Middle East Liquidity Crunch Starts to Bite

That bond raised $400 million through Citi, ING, JP Morgan, National Bank of Abu Dhabi, Natixis and Standard Chartered, in a deal that placed half of its distribution into the Middle East. But the market had been expecting a benchmark, which generally suggests at least $500 million. Initial price guidance had been “mid to low 200bp over mid-swaps”, guidance which then changed from spread to yield with new guidance of “4%”. That ended up being the final yield, equating to about 235 basis points.

That bond followed the cancellation of a deal by Gulf Investment Corp, which finished a five-city global roadshow through Citi, HSBC, National Bank of Abu Dhabi and Standard Chartered on November 2, again with expectations (albeit never explicitly stated) of a $500 million deal. Those close to this transaction suggest that a deal could have been completed, but that the issuer was not happy with the price it would likely have had to pay.

Next off the rank was National Bank of Oman, which, notwithstanding the clear headwinds for conventional issuance, nevertheless pressed ahead with an additional tier one (AT1) deal, eventually raising $300 million through a no-grow Reg S five-year format, priced to yield 7.875%. While some in the market wondered why on earth anyone would attempt a subordinated perpetual deal in the same week that one more mainstream bond had been pulled and another downsized, the leads – Bank of America Merrill Lynch, Citi, Credit Agricole CIB, National Bank of Abu Dhabi and Standard Chartered – are believed to have felt there was nothing to be gained by waiting because there was no good reason to expect sentiment to improve.

At the time of writing, International Bank of Qatar was concluding a roadshow for a senior unsecured deal. It is being closely watched. “Not only is there a drain on Middle Eastern liquidity,” says one banker in the region, “the problem is we already seem to be hitting resistance from international investors to buy paper from the region.”

Still, there is brighter news in the sukuk markets, where Qatar Islamic Bank raised US$750 million of five-year Reg S funding on October 20 with a minimum of fuss, paying 2.754%. Bassel Gamal, group CEO of QIB, says the deal attracted more than US$1.75 billion in orders. By its own standards, it paid heavily – 135bp over mid-swaps, compared, for example, to 125bp for a similar deal from Dubai Islamic Bank in May despite DIB being rated a notch lower – but at least it got the money.

Gamal attributed the deal’s success to “the continued strong support and confidence of international, regional and local investors in the fundamentals of Qatar’s economy, its strong banking sector and Qatar Islamic Bank’s underlying credit quality”, and no doubt there is some truth in that, but perhaps it also demonstrates the role Islamic accounts may play in a time of weak conventional liquidity. For many years now, DCM bankers in the region have pointed out that a sukuk has a greater potential investor base than a conventional because conventionals will buy both but Islamic accounts can only buy sukuk.

One might also point to a $500 million sukuk from Saudi Arabia’s Arab Petroluem Investments Corp in October as a demonstration of continuing regional appetite for Islamic paper: 80% of that deal was sold in the Middle East. And a $500 million corporate real estate issue from UAE’s Majid Al Futtaim Group in late October was also Islamic: it raised 10-year funds and priced flat to its existing curve.

It is perhaps no surprise that Albaraka Turk has opted for the sukuk format for its forthcoming Basel III-compliant Reg S tier two subordinated deal, despite the fact that no such deal has ever been done from Turkey as a sukuk. That roadshow was underway at the time of writing through seven bookrunners. Saudi Electricity, too, has approval for a dollar sukuk programme of up to US$1.5 billion, announced in September.

Sovereigns have, so far, had a relatively easy time; Jordan raised US$500 million on November 4, and at the end of October Lebanon raised a US$1.6 billion three-tranche Eurobond including a 20-year dollar tranche, its longest ever.

But even with the Lebanon blow-out, not all is as it seems: the notes are part of a voluntary exchange programme for existing bonds, Lebanon’s central bank was responsible for $500 million of the demand, and Lebanon’s vast diaspora and the need for its banks to buy any new government paper tend to distort the behaviour of sovereign bonds. So make no mistake: the Middle East’s liquidity crunch is real, and not about to ease.