Middle East

Middle East Credit Markets Brief

Saudi Arabia loses market share in the oil sector – Saudi Electricity Co. in talks over sukuk – ACWA makes landmark 22-year trade – Etihad bonds drop on Alitalia news – UAE bankruptcy laws to improve operating environment – Dana Gas in debt restructuring talks – ADCB plans new issue – QNB hits the market, plans to make inroads in KSA – Bahrain feels FX strain – Oman in US$3.6bn loan talks – OETC prices upsized trade – Jordan places another Eurobond – NBK mulls new unsecured notes – Iran struggles to attract foreign investment

May 12, 2017 // 3:46PM


Saudi Arabia

Saudi Arabia is losing its oil market share in favour of Iraq and Iran as OPEC agreement on cuts hits global oil producers unevenly, according to the head of research at Abu Dhabi Investment Authority. Saudi Arabia, OPEC’s biggest producer, agreed to cut output by 486,000 barrels a day while Iraq said it would cut 210,000 barrels a day. Iran was permitted to increase output by 90,000 barrels a day, according to the OPEC accord. In related news, Saudi Arabia and Russia signalled they could extend production cuts into 2018, doubling down on an effort to eliminate a supply surplus just as its impact on prices wanes. In separate statements just on Monday, the world’s largest crude producers confirmed for the first time they would consider prolonging their output reductions for longer than the six-month extension widely expected to be agreed at the OPEC meeting on May 25.

State-owned Saudi Electricity Company is said to be in talks with regional and international lenders about issuing a US dollar denominated sukuk, according to a report from Reuters. The company is reportedly close to finalising the list of banks that will arrange the transaction, which be upwards of US$1bn in size.

The head of Saudi Arabia's Central Bank announced that the country would stick to the currency peg linking the Saudi riyal to the US dollar. "The peg exchange rate has served us very well and it continues to serve us, so we will stick to it," Ahmed al-Kholifey told an investment conference at the end of April.

The Saudi government is looking to tap the international and domestic bond markets again this year, with the exact amount depending on demand for and the pricing it can obtain, Finance Minister Mohammed al-Jadaan said on last week. He told an investment conference that the state budget deficit would be funded with three streams - international debt, local debt and drawing down the government's financial reserves - and that using the reserves would be the last resort. Saudi Arabia issued a debut US$17.5bn sovereign international bond last year, followed by a US$9bn sukuk last month, but halted monthly domestic bond issues at the end of last year to ease pressure on banking sector liquidity.

Saudi Deputy Crown Prince Mohammed bin Salman said his radical reforms were succeeding in protecting the kingdom against low oil prices, and promised massive investments in coming years to help diversify the economy beyond oil. "Although our prices dipped to as low as $27 for more than one year...the government managed to shield economic indicators from the negative impact," bin Salman said in a rare nationally televised interview on Tuesday. He also claimed that the planned sale of a stake in Saudi Arabia's national oil company Saudi Aramco will occur through an initial public offer of shares in 2018, and the stake sold "will be not be very far off 5%". In the three years after the share sale, the PIF will spend over SAR500bn (US$133bn), with between 50% and 70% going to develop promising non-oil sectors such as mining and logistics within Saudi Arabia, he added.

ACWA Power Management and Investments, a Saudi Arabian power company, issued international bonds for US$814mn maturing in 2039 with a 5.95% coupon. Notes were sold at a price of 100% with an initial yield of 6.039%. CCB International, Citigroup, Jefferies, Mizuho Financial Group, National Commercial Bank, and Standard Chartered Bank acted as joint bookrunners.


United Arab Emirates

Etihad's bonds took a hit after workers at Alitalia, in which Abu Dhabi airline has a 49% stake, rejected the company's turnaround plan. Union rejection of the plan at the end of April bars the troubled airline from accessing rescue funding. The move prompted notes issued by EA Partners, an Etihad-linked SPV used to issued debt, to trade in the 91-93% price range.

UAE banks' balance sheets will continue to remain constrained due to more conservative lending despite broadly improving liquidity, according to a recently published report from Alvarez & Marsal. The professional services firm said the decline in loan growth outstripped deposit growth in 2016. "However, the good news is we are seeing signs of this downward cycle bottoming out. There is plenty of reason for banks’ shareholders to feel optimistic. Returns are still considerably higher than in other parts of the world, and banks are being run very prudently," said Dr. Saeeda Jaffar, a director at Alvarez & Marsal.

Changes in UAE bankruptcy laws are expected to boost investment in the country, according to banking experts present at the Emirates Institute for Banking and Financial Studies (EIBFS) conference in Dubai. The new commercial companies law and insolvency law could become key steps to positioning the UAE as a favourite destination for investors and creating a business-friendly environment in the country.

Dubai Group, an investment firm owned by the emirate’s ruler, requested creditors to take a cut on the debt maturing in 2024 in exchange for an early settlement, Reuters reported. The company completed a restructuring on around US$6bn of debt in 2014, with lenders agreeing to extend the maturity for secured debt to December 2016 and unsecured loans to December 2024. In the last few days the firms offered creditors around 29 cents on the dollar in return for an early settlement of debt maturing in 2024, the sources said, declining to say the value of the amount.

Dana Gas said this week it would pursue debt restructuring talks with creditors in a bid to retain more capital. The company is looking to restructure a US$700mn sukuk maturing in October this year, according to multiple reports, the company's third debt restructuring in 5 years.

Abu Dhabi Commercial Bank (ADCB), the UAE second largest bank, plans to issue a senior unsecured dollar bond, Reuters reported. The transaction is expected to be of benchmark size, which usually means at least US$500mn. Four unspecified banks have been hired to manage the deal.

The Emirate of Sharjah has confirmed that it has no plans to issue any new debt following on from its January 2016 sukuk, it confirmed this week. “Currently we don’t have any plans for bonds or sukuk issuance in the near future. We will always keep a close eye on market conditions and keep our own financial needs under review,” Tom Koczwara, director, debt management office, finance department at Government of Sharjah told Gulf News reporters.

Growth in the UAE is likely to remain subdued in 2017, according to the IMF. The fund expects growth to increase 1.5% this year, down from 2.7% in 2016, while more fiscal reforms including a new VAT of 5% should help push growth towards 4% by 2020.

Loan growth in the UAE is expected to range between 2-5% in 2017, healthier levels than those seen the previous year, according to Bernd van Linder, Chief Executive Officer of Commercial Bank of Dubai (CBD).  "While the overall liquidity situation has improved from last year, provisions have largely stabilised and the capitalisation levels are strong across the sector," van Linder told reporters at the Bank's headquarters this week.



Bank assets in Qatar rose by QAR18.1bn to QAR1.28tn in March, according to data from the country's Central Bank. Domestic lending to the private sector increased by QAR500mn to WAR439bn, while loans to the public sector dropped by QAR13.8bn.

Qatar will look to reassess its bond issuance programme in the second half of this year, according to a report from Bank of America Merrill Lynch. “A strategic decision has been taken not to tap the Qatar Investment Authority (QIA) foreign assets. This is in part due to the rate of return on QIA assets being greater than the cost of borrowing and as it allows QIA’s investment income to be reinvested,” explained Bank of America Merrill Lynch MENA Economist Jean Michel-Saliba in the bank's recent monthly report.

Qatar National Bank (QNB), the largest lender in the Middle East by assets, announced it is planning to apply for an investment banking licence in Saudi Arabia, where low oil prices are expected to encourage more asset sales and debt raising. This comes after Citigroup applied for a license after a 13 year absences, while Credit Suisse is said to also be considering obtaining a banking permit in the kingdom.

Qatar National Bank issued international bonds worth US$100mn maturing in 2018 with a 2.15% coupon. The notes were sold at a price of 100% and Standard Chartered Bank acted as the sole bookrunner.



Bahrain's foreign currency reserves are likely to remain strained as declining oil prices put further pressure on the country to prop up its currency. Bahrain's FX reserves declined 11%, according to Central Bank data, while net foreign assets continued to decline to multi-year lows.

A delegation of Bahraini businesses was in India in early May trying to shore up further support for bilateral trade. A group of about 15 Bahraini businesses are participating in the week-long meetings, aimed at attracting more Indian companies to invest in Bahrain. Trade between the two nations has been on the decline since 2010.



Kuwait Deputy Prime Minister and Finance Minister Anas Al-Saleh has reaffirmed the country's commitment to reforms despite an uplift in global oil prices, he told Kuwait Times in an interview last week. The country has already cut a raft of power, fuel and water subsidies as part of its reform plans, with further reforms including tightening of fiscal spending and improving government efficiency. Despite the progress being made on the reform front, the IMF still believes the country will need to raise up to US$114bn to finance the budget deficit over the next six years.

The National Bank of Kuwait is considering issuing fresh unsecured bonds, according to multiple reports and banking sources. NBK, the country's largest lender by assets, could issue up to US$500mn in new senior unsecured notes by the end of May.

Kuwait Energy Plc, an oil and gas explorer, plans an IPO that would make it the first company from any OPEC nation to have its stock traded on the London Stock Exchange (LSE). The oil company expects to raise about US$150mn in the IPO, while the shares should start trading in June, the independent energy producer said.



Oman Electricity Transmission Company issued international bonds for US$500mn maturing in 2027 with a 5.196% coupon. Notes were sold at a price of 100%. Bank Muscat and JP Morgan acted as joint bookrunners.

Oman is looking to raise up to US$3.6bn from a group of Chinese lenders. The unsecured deal, which is being managed by Bank of China, China Development Bank, and Industrial and Commercial Bank of China, will carry a tenor of 5-years and all-in pricing of LIBOR+190bp.

The Oman Investment Fund (OIF) has closed general syndication of a US$600mn, the proceeds of which will be used to acquire the government's 51% stake in Omantel. The facility, raised by OIF subsidiary United Telecommunication Ltd., carries a 5.25-year tenor and is split between a US$450mn conventional facility and a US$150mn Islamic tranche. Citi acted as underwriter on the facility, with Banca IMI/ Intesa Sanpaolo, Kuwait Finance House and National Bank of Abu Dhabi joining the transaction as Underwriters and Bookrunners.



The Kingdom of Jordan issued US$500mn worth of Eurobonds with a yield of 5.875% last week. The bonds are due in 2026 and received orders for more than US$1.7bn, or more than 300% of the issuance value. This sale is part of a cash flow plan designed to secure financial needs in accordance with the public debt strategy aimed at diversifying sources of finance and reducing borrowing costs, as well as increasing the maturity dates of the public debt portfolio. The transaction was managed by JP Morgan and Citigroup.



Egypt's Central Bank has delayed its monetary policy meeting to May 21, three days later than originally scheduled. The Bank gave no reason for the move. The meeting will be the Bank's first since March 30, when it held its key overnight and lending rates steady at 14.75% and 15.75%, respectively.

Egypt’s inflation rate fell for a third month, giving the government breathing room as it prepares to accelerate reforms that caused prices to surge and weakened the pound by more than half against the dollar. Consumer prices rose 1.7% in April from a month earlier, the slowest pace since October before the Central Bank floated the currency and raised interest rates.

Egypt may issue US$1.5bn to US$2bn in international bonds in the coming few weeks, Finance Minister Amr el-Garhy said to local television channel CBC. This would be the second time the sovereign taps the international markets, after selling US$4bn notes in January.

The International Monetary Fund will review Egypt's austerity programme as the country looks to receive a second instalment of its US$12bn funding package. The Middle Eastern sovereign is looking to secure the latest US$1.25bn tranche from the lender.



Iran is struggling to attract necessary amount of foreign capital as it continues its efforts to once again become a presence on global capital markets, following years of exile due to US-led sanctions. Last year Iran cemented a landmark nuclear agreement with six world powers that was expected to ease the sanctions regime and Hassan Rouhani, the country’s reformist president, said it would aim to attract at least US$30bn a year of foreign investment. Last year 400,000 business visitors and 300 delegations of foreign investors visited the country, according to Farid Dehdilani, international affairs adviser at Iran’s privatisation organisation, quoted by the FT. However, he admitted that despite these visits the country attracted only US$3.6bn of foreign investment in 2016.

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