October 5, 2015 / 11:33 AM / 4 years ago

MIDEAST DEBT-Cheap oil shrinks Gulf bond sales as liquidity tightens

* GCC’s Jan-Sept international issues lowest since 2008

* Bank liquidity deteriorating with less oil money

* So spreads widening in primary, secondary bond markets

* Some banks keeping back money to invest in sovereign debt

* Many maturing bonds in Q4 may not be replaced

By Archana Narayanan

DUBAI, Oct 5 (Reuters) - Low oil prices are stifling new corporate bond issuance in the Gulf as governments get less energy revenue, leaving banks and other institutional investors with less money to buy debt.

International bond issues from the six-nation Gulf Cooperation Council, including both corporate and sovereign issues, dropped 33 percent from a year earlier to $22 billion in the first nine months of 2015, Thomson Reuters data shows.

That is the lowest nine-month total since 2008, during the global financial crisis, when issuance totalled $15 billion.

Economic growth has stayed robust, so companies still want to raise money. But investors have become less willing to buy bonds at ultra-low yields. Facing higher costs, some companies are cancelling issues.

While some bankers cite geopolitical tensions in the Middle East and the approach of monetary tightening by the U.S. Federal Reserve, both factors have existed for many months.

Now liquidity is tightening as governments deposit less oil earnings with banks. Last year, banks were so flush with cash that they bought regional bonds almost indiscriminately; that is no longer the case.

“Wider spreads being demanded by bond investors, significant deterioration in the liquidity in the banking sector and the implication for the loan market, and of course the looming rate hike from the Fed are collectively making chief financial officers’ funding strategy more difficult,” said Chavan Bhogaita, a managing director at National Bank of Abu Dhabi.

An early sign of trouble came in June, when Dubai builder Drake & Scull tried and failed to issue a perpetual Islamic bond worth about $150 million-200 million.

A bigger shock came two weeks ago when Abu Dhabi Commercial Bank cancelled a six-year issue expected to total at least $500 million, which it had started to market. The main obstacle was a lack of strong bidding by Gulf institutions, bankers said.

MONEY RATES

Rising GCC money market rates show how liquidity is tightening. After hovering around 0.10 percent for over two years, the United Arab Emirates’ overnight interbank rate shot up to 0.46 percent in the past several weeks.

Even where their deposits are still growing, banks appear to be keeping back money for future investment in local-currency government bond issues, which are increasing to cover budget deficits created by cheap oil. Saudi Arabia has begun issuing sovereign bonds for the first time since 2007, Kuwait is considering such a step, and Oman has boosted issuance.

In the secondary bond market, weaker bidding by Gulf banks is causing corporate spreads to widen gradually. The spread of a February 2021 dollar bond from Qatar’s Qtel International Finance over a January 2021 bond from South Korea’s Export-Import Bank has doubled to 49 basis points since mid-August.

Companies which choose not to issue bonds may turn to the loan market - though costs have been rising there too - or simply draw down cash reserves. If cheap oil causes economic growth in the region to slow next year, as economists expect, companies may need less money.

In the fourth quarter of 2015, Gulf companies have $8.35 billion of bonds maturing; bankers believe many of these may not be replaced by fresh issues.

“A large part of debt maturing in Q4 may not be refinanced, and companies may choose to retire it because of wider bond spreads. It will partly be refinanced from the loan market,” said Chirag Doshi, senior vice-president for investments at Qatar Insurance Co.

“This cash will offset the liquidity shortage in the system to an extent and provide a strong technical support to the GCC fixed income market.” (Editing by Andrew Torchia, Larry King)

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