Debt activity picked up in the Gulf in May, and it could be the same this month before a summer lull

Two months into the (albeit shaky) ceasefire, Gulf companies and sovereigns are slowly returning to debt markets, with May seeing USD 11.2 bn in issuances across the region, Bank Nizwa’s Senior Head of Treasury and Global Markets Muhammad Ahsan tells EnterpriseAM — but the window hasn’t opened for everyone.

The figure is not too bad when you consider the ongoing geopolitical uncertainties in the region, with multiple instances of the US and Iran exchanging fire, and a week of Eid holidays, Ahsan tells us.

When it comes to spreads, they’ve tightened significantly since the beginning of the war, with investment-grade names seeing spreads at tighter than they were at the start of the war, Amwal Capital Co-Head of Fixed Income Zeina Risk tells us. Banking and real estate firms’ spreads are still wider than pre-war levels, she adds.

The pricing premium, however, is nothing alarming or exceptional given the geopolitical situation, Ahsan explains.

“I believe investors are generally receptive to new issues from across the region as we have seen strong demand for the new [transactions],” Ahsan says. “Spreads are slightly elevated and base yield levels have moved higher, which makes all-in yields attractive,” he adds.

Already, June is starting off strong. Bahrain was the first Gulf sovereign to return to public debt markets since the war, and Dubai Islamic Bank became the latest bank to issue an AT1 sukuk, raising USD 1 bn at almost prewar-level spreads, Ahsan says.

Looking ahead

“We see activity continuing in June before taking a breather in July and August due to the summer lull,” Ahsan says. Rizk also sees activity resuming in June, though she expects issuances to pause ahead of the US Federal Reserve’s FOMC next week, before it resumes depending on market conditions.

Rizk is skeptical that the Fed will move at all. With CPI data coming in largely neutral and payrolls strong, she says arguments exist in both directions, but her base case is that the Fed stays on hold for the rest of the year — absent a significant shift.

Most activity will likely be from corporates, both investment-grade and non-investment-grade, as sovereigns have already raised plenty of funding from private placements, Ahsan points out.

The window is opening up, but not for everyone — Ahsan and Rizk both expect real estate firms to wait out the market. Ahsan says non-investment-grade corporate, especially in the hospitality and real estate sector in the UAE, are likely to stay away from the markets, saying that “levels are prohibitive for them and they don’t face any major refinancing pressures.”

REMEMBER- Abu Dhabi raised USD 2.5 bn in April from private debt placements, while Qatar also raised some funds from private markets — as did several UAE banks including First Abu Dhabi Bank, our friends at Mashreq, and Emirates NBD.