* GCC's international bond issuance set for record in 2017
* Bonds replacing syndicated loans as primary debt
* This eases liquidity pressure on regional banks
* Institutional investors drawn by higher bond market
* Loans to remain first option for many corporates
By Davide Barbuscia and Saeed Azhar
DUBAI, April 26 The volume of international bond
issues from the Gulf may hit a record high for a second straight
year in 2017 as lower oil prices crimp the capacity of banks to
finance billions of dollars of investments and state budget
Issuance data shows the six-nation Gulf Cooperation
Council's bond market is on track to become more important than
its syndicated loan market in a region traditionally dominated
by relationship-driven bank lending.
This historic shift is positive for economies because it
eases risks and liquidity pressures for the region's banking
system, which has been hurt by smaller flows of petrodollars,
bankers and economists say.
It is also changing the behaviour of investors in the bond
market, which has long been led by local banks that buy the
bonds to hold them until maturity rather than trading them.
Jumbo bond issues by governments – such as Saudi Arabia's
$17.5 billion debut sale last October, the largest ever in
emerging markets - have deepened the market and created new
pricing benchmarks. This has stimulated trading activity,
attracting more institutional and foreign investors.
Monthly Reuters polls of Middle East fund managers in the
last few months have shown their interest in bonds at or near
record levels, to a large extent because of the bond market's
The trend looks set to continue. Last year Standard & Poor's
estimated the funding needs of GCC countries - Saudi Arabia, the
United Arab Emirates, Kuwait, Qatar, Oman and Bahrain - at $560
billion between 2015 and 2019. This will push regional
governments to rely heavily on bonds.
"The financing requirements are significantly larger than
they have been historically," said Jonathan Segal, head of
capital markets for the Middle East and Africa at Mitsubishi UFJ
"Given that the region's financing requirements have risen
very sharply, absolutely there is a need for the region to be
looking at other sources of financing and doing more to attract
SPIKE IN ISSUANCE
The GCC's international bond issuance was around $30 billion
each year from the mid-2000s until it suddenly spiked to a
record of $69 billion in 2016, Thomson Reuters data shows.
Meanwhile, syndicated loan volumes totalled about $60
billion annually in 2013 and 2014, $70 billion in 2015 and $78
billion last year. If the current trends continue, bonds could
overtake loans this year.
"Syndicated loans will continue to be important, for
instance in the project finance space, but debt capital markets
will remain in focus going forward," said Monica Malik, chief
economist at Abu Dhabi Commercial Bank.
Segal said: "In this region, in the past if you had $1
dollar of DCM (debt capital markets) for financing, roughly $3
came from loans. Now I would not be surprised if there is
Some borrowers are expected to continue to fuel demand for
bank loans, however.
"The absence of local currency bond markets leaves regional
corporates with little choice but to resort in the first
instance to traditional bank loans," said Dima Jardaneh, head of
regional economic research at Standard Chartered.
"Also, transparency requirements for tapping international
capital markets could still be a deterrent for a large segment
of corporates in the region."
Bank lending on a project finance basis will remain key for
many of the Gulf's multi-billion dollar infrastructure
requirements. But tight liquidity and regulatory burdens on
banks will limit their lending capacity in this area.
"The project financing gap which the region is expected to
experience for the coming few years will require tapping a wider
array of financing modalities, including structured finance and
project bonds," Jardaneh said.
(Editing by Andrew Torchia and Toby Chopra)