European quantitative easing (QE) could prove to be a catalyst for increased activity in Abu Dhabi’s bond market over the coming months, providing a welcome influx of funds.
In early March the European Central Bank (ECB) announced plans to boost its balance sheet by up to €1trn through an active bond-buying program in a bid to combat the current climate of low growth and deflation.
The move comes as several of Abu Dhabi’s corporations − in line with other regional players − are considering issuing debt as a means of funding their expansion programs. The prospect of higher yields on the emirate’s capital markets is expected to generate particular interest among European investors keen to obtain dollar-denominated bonds, with the dirham pegged to the dollar, especially as the currency rallies.
Europe and beyond
The ECB and the Eurozone’s 19 national central banks are looking to buy up to €60bn worth of bonds each month in a bid to inject cash into Eurozone economies. While the bond-buying exercise is expected to stimulate borrowing, investment and consumer activity in the European markets, analysts expect a portion of the funds to flow offshore, with Abu Dhabi cited as one of a number of possible target destinations.
In early February, National Bank of Abu Dhabi (NBAD) placed Dh2.75bn ($750m) in bonds maturing in 2020, with a 2.25% coupon. Almost half the sale was snapped up by European investors. A combination of attractive direct returns and a stronger US currency, which has risen 12% against the euro this year, gives the dollar-denominated bonds offered in the UAE’s capital markets plenty of appeal, particular as a hedge against the tumbling euro.
European investors “believe the short- to medium-term trend will be dollar appreciation, so it makes sense for them to look elsewhere, especially the emerging markets,” Angelo Rossetto, a trader at GMSA Investments, told Bloomberg in March.
At the same time, a report issued by Barclays Capital in early March said that a weakening in the flow of bank deposits may well lead to an increase in bond issuance in Abu Dhabi and other Gulf states. With a key source of liquidity in part drying up due to lower oil prices, corporations in the region may turn to the bond market rather than bank borrowing to fund their activities, Barclays said.
“Corporates have taken advantage of excess bank liquidity by borrowing in loan format on generous terms, but they may now have to turn increasingly to the bond market, as a less sanguine economic outlook would slow credit growth,” the report said. “Together with the increasing issuance from GCC banks, this could result in higher than previously expected GCC bond issuances this year.”
Activity on the rise
Abu Dhabi’s funding market is already heating up. Reuters recently reported that Mubadala GE Capital, which operates in the commercial leasing and lending, distribution and vendor finance solutions segment of the market, was considering a bond issue as a means of supporting its own lending activities. The firm – a 50:50 commercial finance joint venture between Mubadala Development Company, a state-owned investment firm, and General Electric Capital Corporation – is reportedly looking to raise at least Dh1.8bn ($500m) through a bond sale.
Past performance suggests a positive outlook for the sale. Its inaugural bond, a Dh1.8bn ($500m) five-year note yielding 3% floated in November last year, drew strong interest, attracting orders of more than Dh4.7bn ($1.3bn). European investors accounted for nearly a third of sales from the November issue.
In early March, a separate issue by the Abu Dhabi Commercial Bank drew strong bidding, with investors pledging orders upwards of Dh6.2bn ($1.7bn) for the five-year dollar-denominated bond against an expected issuance level of Dh1.8bn ($500m) or more. NBAD has left the door open to bolster its coffers while borrowing costs are low. At the bank’s annual ordinary general meeting on March 10, shareholders approved a motion in favor of issuing a Tier-1 perpetual bond program to the maximum amount of Dh7.3bn ($2bn).
Oxford Business Group
23 April
