(MENAFN- Arab Times) DUBAI April 2 (RTRS): Order books for Gulf bond issues are shrinking suggesting exuberance in the market is fading slightly after several years of massive demand and ultra-tight pricing. A $1 billion 10-year sukuk issue last week by the emirate of Ras al-Khaimah rated A by Standard & Poor's drew roughly $2.5 billion of investor orders.
That was a comfortable amount but much smaller than the $7.85 billion attracted by the similarly rated emirate of Sharjah for a $750 million 10-year sukuk issue six months ago. Both sukuk used the ijara format and priced at 110 basis points over midswaps. Dubai Islamic Bank's $1 billion sukuk issue in January generated nearly $2 billion of demand but didn't come close to the bank's perpetual debt sale in March 2013. That $1 billion Tier 1 sukuk issue was 14 times subscribed. The smaller size of order books doesn't appear to be causing propective borrowers to pull any issues and it doesn't even seem to be affecting pricing significantly. But it does indicate that bond market conditions in coming months could be a little more difficult for issuers. Lower-rated issuers may have to become slightly more modest in their fund-raising ambitions. Orders National Bank of Kuwait rated A-plus by Standard and Poor's and Aa3 by Moody's upsized its Tier 1 bond issue this week to $700 million from $650 million after receiving orders worth $1.4 billion. But BBK formerly known as Bank of Bahrain and Kuwait and rated BBB by Fitch issued only $400 million of five-year bonds two weeks ago after originally indicating a benchmark deal which was understood to mean at least $500 million. Orders were $900 million. 'Interest in regional credits is intact but the exuberance is gone' a Dubai-based asset manager said. Bankers involved in arranging some of the recent Gulf bond issues said that while demand from both local and foreign investors had diminished most of the reduction appeared to occur among foreign investors. Local institutions have fewer investment options than foreigners and are in any case disposed to keep their money in the region. Several factors may be squeezing order books. One is banking system liquidity in the Gulf; the plunge of oil prices may be reducing the amount of money which local banks have available to buy bonds by cutting the oil revenues which governments deposit in the banks. The latest official data suggests this is not happening to any great degree. Deposit growth has slowed only modestly and governments are willing to draw down foreign reserves if necessary to prevent any tightening of domestic liquidity. Deposits Bank deposits in the United Arab Emirates rose a healthy 1.3 percent from the previous month in February and the loans-to-deposits ratio is at 0.97 down from 1.00 a year ago showing conditions have actually loosened a bit. Deposits at Saudi Arabian banks surged 3.6 percent from a month earlier in February. In both countries short-term money market rates have not risen significantly from multi-year lows. What may be happening is that some local banks are looking ahead to the possibility of substantial liquidity tightening late this year or in 2016 because of cheap oil or the start of US interest rate hikes. This prospect may be causing banks to bid less generously for bond issues. But any US interest rate hikes are likely to be very gradual so Gulf tightening will be as well. Some central bankers in the Gulf have said they expect to have leeway to tighten somewhat more slowly than the US Federal Reserve. Another factor behind smaller order books appears to be pricing. Yields on other emerging market bonds have risen in recent weeks even as those on Gulf bonds have stayed low pressed down by limited supply relative to demand. This has reduced the attractiveness of Gulf bonds for foreign investors in particular. The spread of a 2019 bond issued by China's Sinochem over Abu Dhabi National Energy Co's September 2019 bond which was 11 basis points at start of this year widened to as much as 94 bps on Jan. 21. It is now at 20 bps; both state-run firms are rated A3 by Moody's. A third factor dampening demand may be the Yemen conflict. Most local investors are used to such instability and do not expect it to have a serious impact on Gulf economies or markets but some foreigners are more skittish. 'The Yemen conflict clearly escalates political uncertainty in the Gulf and will therefore negatively impact international investor confidence' said Daniel Broby chief executive at London-based Gemfonds. If oil prices stay low US interest rates rise and the fighting in Yemen continues pressure on order books looks likely to continue. But the structure of the Gulf bond market limited supply and a large investor base of cash-rich local institutions means demand for bonds won't collapse. 'Order books continue to generate strong subscriptions from Gulf-based investors which doesn't suggest any reduction in risk appetite' said Mohammed Dawood managing director at HSBC Middle East.
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