* Different than past periods of global instability
* Wall of uninvested money supports bonds
* More confidence corporate debt problems can be solved
* Sukuk swing to underperforming conventional bonds
* Any oil drop to $80 could still hit market hard
By Mala Pancholia
DUBAI, June 6 Bonds in the Gulf Arab oil
exporters are outperforming fixed income markets in many other
countries as the world's economic climate darkens, suggesting
the Gulf may have turned a corner in convincing investors of its
Gulf bonds were hit hard between 2009 and 2011 when the
initial stages of the global financial crisis burst credit and
real estate bubbles in the region.
Now the Gulf is threatened by another wave of the crisis:
weak U.S. and Chinese economic data and Europe's debt problems
dragged Brent crude oil as low as $95 a barrel this
week, the lowest since January 2011, from around $125 early this
year. In a region where energy exports are some 30-50 percent of
nations' gross domestic product, that will have a major impact.
So far, however, bonds in the Gulf have held up well -
surprisingly well, in the view of some experts. Spreads on the
HSBC-Nasdaq index of conventional bonds in Gulf Cooperation
Council countries have widened only moderately to 301 basis
points on June 1, when the last reading was taken. That is a
rise of 7 percent since April 2.
It is a better performance than many bond indexes elsewhere
in the world. Spreads on the iTraxx Asia ex-Japan index
for investment grade bonds have risen to 206 bps
between the start of April and June 5, a climb of over 32
percent. Spreads on the iTraxx Europe Crossover index
, composed of 50 companies rated at the very bottom
of the investment-grade category or in "junk" territory, widened
to 731 bps on June 1, up over 20 percent.
Some of the Gulf's strongest credits have barely moved
during the global volatility. Qatar's $2 billion, 3.125 percent
sovereign bond maturing in 2017 was yielding 2.46
percent on Wednesday, tighter by 67 bps since issue in December
and only 13 bps wider than the yield's record low in early May.
Weaker Gulf credits have also done well. Dubai is still
working through its corporate debt problems, and its credit
default swaps are in a higher bracket than those of wealthy
Qatar, Abu Dhabi and Saudi Arabia.
But Dubai's $600 million, 4.9 percent sovereign sukuk
, maturing in 2017 and issued last month, offered
a yield of 4.44 percent on Wednesday. If Dubai were rated, it
would be a minimum BBB, analysts believe. By comparison,
Indonesia's $1 billion, 6.875 percent bond maturing in
2017, rated BBB-, is yielding 3.37 percent.
Brazil's $2.5 billion, 6 percent bond maturing in the same year
, rated BBB, yields 2.08 percent.
WEIGHT OF MONEY
One reason for the Gulf's good performance is the region's
large pool of unused investment money. Last year's strong
economic growth - Saudi Arabia grew 6.8 percent and the United
Arab Emirates, 4.2 percent - built up wealth which, because of
the global crisis, has had few attractive investment channels
available to it.
"The sheer weight of money waiting to be deployed in the
region has meant that investors are currently trading with a
'buy on weakness' stance" in Gulf bonds, said Mark Watts, head
of fixed income at the asset management group of National Bank
of Abu Dhabi.
During past waves of the global crisis, Gulf bonds were hit
by "forced selling" as desperate European and other foreign
investors, suffering in their home markets, sold assets in the
Gulf to raise money. This time, there appears to be less forced
selling, perhaps because the most desperate investors have
already pulled out their money.
But another factor is also supporting the Gulf: a sense that
despite continued risks, the region is succeeding in working
through its corporate debt problems, and that while bank loan
creditors may suffer in restructuring deals, governments will
act as needed to make sure public bonds are repaid in full.
In Dubai, for example, a looming $1.25 billion sukuk
repayment by DIFC Investments and a $2 billion bond maturity at
Jebel Ali Free Zone have been seen as this year's biggest tests
of the emirate's corporate creditworthiness. In the last few
months both state-owned companies have announced plans to raise
money to meet those maturities.
Similarly, Saudi Arabian property developer Dar Al Arkan
has been seen as a danger spot in the credit universe,
but the yield on its 2015 sukuk sank to a new low
of 9.69 percent this week from 14 percent at the start of this
year as prospects for the company have appeared to improve.
In late May state-owned petrochemicals giant Saudi Basic
Industries Corp said it was buying part of a
residential project from Dar for 742 million riyals ($198
million). This will help Dar obtain funds to meet a $1 billion
sukuk redemption in July.
Not everyone is convinced that Gulf bonds can continue
outperforming so comfortably. At present, oil prices are still
high enough for all six GCC countries except Bahrain to keep
their state budgets in surplus. This will start to change if oil
continues dropping to around $80 - then markets could begin to
get nervous about state finances, even though most governments
have enough reserves to run budget deficits for many
"If the euro zone debt crisis escalates, there will
inevitably be an impact on GCC markets," said Biswajit Dasgupta,
head of treasury and trading at Invest AD in Abu Dhabi.
"So far, our markets have been supported by several factors
- relatively better yields compared to ratings, banks with high
liquidity and reasonably strong capitalisation but low credit
growth, Islamic investors looking for assets.
"But if risk aversion increases sharply then the demand will
start to fall away."
Watts at National Bank of Abu Dhabi also said that if the
cumulative weight of bad news about the global economy became
too great, buyers for Gulf bonds would evaporate and prices
would be marked down.
"I believe that the GCC credit market is vulnerable to this
over the coming weeks and have positioned accordingly," he said.
For now, however, investors seem fairly confident. During
the last bout of Gulf market jitters in mid-2011, sukuk
outperformed conventional bonds because Islamic instruments were
seen as less vulnerable to speculation and were believed to
attract a more committed investor base than conventional debt.
This time, however, sukuk have been slightly underperforming
conventional bonds in the Gulf. The spread on the HSBC-Nasdaq
sukuk index, which includes sukuk globally, widened to 268 bps
on June 1, up 12 percent since April 2.