* 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
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,
"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