Emirates NBD Bond May Signal More Euro Issues From Gulf

More borrowers from the Gulf are likely to sell euro-denominated bonds after this week saw the first such benchmark issue by a Gulf financial institution in at least nine years, bankers say.

Emirates NBD (ENBD), Dubai’s largest bank, issued 550 million euros ($589 million) of seven-year notes on Monday at 135 basis points over midswaps.

Traditionally, Gulf borrowers have issued almost entirely in U.S. dollars – the currencies of most Gulf countries are pegged to the dollar and their oil revenues are denominated in dollars.

Only a handful of Gulf companies have sold euro-denominated bonds in the last several years, including United Arab Emirates telecommunications firm Etisalat, petrochemical giant Saudi Basic Industries Corp, and Abu Dhabi’s International Petroleum Investment Co (IPIC).

Now, however, market conditions may have shifted so far in favour of euro issuance that Gulf borrowers may leave their comfort zone and start to follow a shift towards the euro seen in other parts of the world.

The launch of the European Central Bank’s 1 trillion euro money printing plan this month is adding to heavy demand for relatively high-yielding debt from euro zone investors, while weakening the euro currency. Meanwhile the approach of U.S. monetary tightening expected later this year is an obstacle to issuing in dollars.

“We are likely to see more euro-denominated issuances from the Gulf region going forward,” said Mustafa Ata Aziz, head of debt capital markets for the Middle East and North Africa at HSBC, which was one of the banks arranging the ENBD bond.

“Investor diversification and access to a deep liquidity pool will be the main drivers for the deals.”

ORDER BOOK

European investors’ appetite for dollar bonds from the Gulf has increased in recent months. Those investors bought 42 percent of $750 million of five-year notes which Abu Dhabi’s First Gulf Bank sold last month, up from 34 percent for an FGB issue in November 2013.

National Bank of Abu Dhabi sold 46 percent of a similar maturity dollar debt issue last month to Europeans, against 41 percent for an issue in 2012.

Issuing in euros could increase demand still further. The ENBD bond attracted an order book of 1.1 billion euros, with 170 investors participating and 49 percent of the bond taken by European investors.

In fact, ENBD might have been able to secure a much higher European participation if it wished. Europeans took 80 percent of euro-denominated bonds sold by Etisalat in mid-2014, a seven-year, 1.2 billion euro tranche and a 12-year tranche of the same size.

ENBD has had to pay to issue in euros. It printed a 3.25 percent, five-year dollar bond at 150 bps over midswaps last November; taking into account the cross-currency swap rate and the fact that the tenor of its latest bond is two years longer, it paid a premium of roughly 35 bps to sell this week’s bond, said a source close to the deal.

“Still, a 1.75 percent coupon represents a very low cost of borrowing in absolute terms,” Aziz from HSBC said.

The cost to Gulf issuers of swapping their euros back into dollars has been increasing; the seven-year cross-currency basis swap is now at minus 39 bps, its most expensive since mid-2012, according to Thomson Reuters data.

But cost is not the only motive to issue in euros. Traditionally, cash-rich local banks in the Gulf, flush with oil revenues deposited by their governments, have bought as many bonds as local issuers have wanted to sell. With oil prices having plunged since last June, however, it may now make more sense for issuers to diversify their investor bases, in case cheap oil starts to tighten liquidity at local banks.

For European investors, top Gulf issuers can offer similar or better credit ratings than many European issuers, with a yield pick up of 50-70 bps compared to developed market issuers.

Sergey Dergachev, senior portfolio manager for emerging market debt at Union Investment Privatfonds in Germany, which has about 10 billion euros in emerging market debt under management, said he bought the ENBD bond as a diversification and long-term play.

“It is the best chance to get a longer-term chance to participate in the Dubai growth story, where ENBD is clearly one of the key credits.”

So far, no Gulf issuer has announced plans to follow ENBD by issuing in euros, but Dergachev said he expected IPIC to issue in euros to refinance debt maturing this year. IPIC has a $1 billion, 3.125 percent bond and a $750 million, 1.75 percent bond maturing in November. Abu Dhabi National Energy Co may do the same to diversify its investor base, Dergachev added.