* Four recent deals well-received, more demand seen
* Sluggish bank lending pushes companies towards bonds
* Bank investors can escape loan rate caps
* But lack of sovereign yield curve, regulation are hurdles
* Investors still limit themselves to familiar names
By Sylvia Westall
KUWAIT, May 3 In a region dominated by sovereign and government-related bond issues, Kuwait has bucked the trend over recent months with a series of successful corporate sales that hint at greater capital-raising potential in the Gulf state.
The global financial crisis hit Kuwaiti investment companies hard, pushing some into debt restructuring talks and making banks cautious about lending. Meanwhile, the euro zone debt crisis is causing European banks to pull in their horns.
Bank lending to the private sector grew just 3.2 percent from a year earlier in February, which was slow considering private analysts expect Kuwait's gross domestic product, buoyed by high oil prices, will expand about 3.8 percent this year in inflation-adjusted terms. So Kuwaiti corporations may have little choice but to diversify their funding into bonds.
Narrowing spreads have encouraged this process. Yields on one-year government Treasury bonds have compressed to 1.25 percent in March 2012 from 6 percent in 2006-2007, central bank data shows; with the dinar pegged to a U.S. dollar-denominated basket of currencies, Kuwait has had to follow the global trend of low interest rates.
"With respect to Kuwait, since 2010 we have seen dramatic spread narrowing and as a result, corporate issuers are finding the bond product a viable and cost-reducing alternative," said an investment banker based in the region, who declined to be named because he was not authorised to talk to media.
Corporate dinar-denominated issuance has dominated bond activity in Kuwait since the end of last year; four corporate bonds have come to market worth a total of 178.5 million Kuwaiti dinars ($644 million).
In December, Kuwait's Commercial Facilities Co (CFC), a consumer credit group, priced a 50 million dinar bond through sole lead arranger NBK Capital.
That was followed in January by an 80 million dinar bond issue from major regional investment group Kuwait Projects Co , consisting of two tranches of four-year paper, the largest ever corporate bond deal in the country.
Other recent deals were real estate company AlArgan with a 26.5 million dinar bond, and Kuwait Financial Centre, known as Markaz, with 22 million dinars.
Before CFC, the last time a Kuwaiti firm issued a local currency bond was in June 2010, when United Real Estate Co, a subsidiary of Kuwait Projects, made a 40 million dinar, two-tranche issue.
"There is a pent-up demand in the market, due to the limited local currency bond issuances in the Kuwaiti market since 2008," said Divya Chandran, associate manager at local credit rating agency Capital Standards.
Chandran said there was growing awareness among corporations in Kuwait of the benefits of medium-term bond issuance, after some "duration mismatches" on balance sheets of local companies were exposed during the global financial crisis.
More corporate bond sales are likely, in particular from first-time issuers, Chandran predicted - "some of them as part of their ongoing restructuring programmes, and others are undertaking these efforts to prudently diversify the funding sources and strengthen the balance sheets."
Bank investors may welcome increased corporate issuance because subscribing to bonds allows them to generate higher returns on their money, given interest rate caps imposed by the central bank on loans, a regional fixed income trader said.
However, a lot more needs to be done to make the Kuwaiti dinar bond market vibrant. Some issuers and investors still see bonds as a "last resort" to raise financing in the absence of bank loans. The secondary market for local bonds remains illiquid, the fixed income trader noted.
Kuwait is behind regional peers such as Abu Dhabi and Qatar in developing a clear yield curve for government debt; without such a curve, it is difficult to price corporate bonds.
And Kuwaiti corporate bond deals remain much smaller than the biggest in centres such as the United Arab Emirates and Saudi Arabia. Dubai-based mall developer Majid Al Futtaim Holding issued a $400 million, five-year sukuk in January.
"Convincing issuers to secure a rating and expand funding sources to reduce exposure to banks and bilaterals are two important steps that bankers should take to further the development of Kuwaiti debt markets," said an investor.
Even if Kuwaiti corporations request ratings, however, the ratings agencies may face challenges of transparency, lack of proper regulation and incomplete disclosure that make it difficult to assess the credit quality of borrowers.
Kuwait established its first dedicated financial market watchdog in 2011, but analysts say its role needs to be clarified and strengthened to encourage investment.
Financial authorities have said they want to develop corporate debt issuance, and some steps have been taken in that direction. Kuwait's bourse plans to launch this month a new trading system, backed by The Nasdaq OMX Group Inc, to enable trade of a wide range of financial instruments including fixed income and sukuk, perhaps as early as next year for some of them. But it is still unclear whether such initiatives will be pursued aggerssively by the government.
Rasha Othman, vice president at Markaz, said investors were still only buying bonds from companies with healthy track records and good rapport with the capital markets, while the investor base was largely limited to banks, some government-linked institutions and high net-worth individuals. This prevented the market from reaching the depth of some other corporate bond markets in the region.
"Following the recent debt crisis and the recent bond and sukuk defaults, Kuwaiti bond investors have become more cautious and selective," she said.
"The Kuwaiti bond market has potential to grow exponentially in the next few years, if certain steps were taken towards advancing the development of the market by regulators, issuers, investment banks and the government." (Additional reporting by Mala Pancholia in Dubai; Editing by Andrew Torchia)