UAE companies rush into debt

Posted on November 29, 2011


Is this the bond rush before the meltdown?

This is a photo of a public space in the cente...

Abu Dhabi's oil riches help its companies get better ratings and pricing on bond and sukuk issues. (Image via Wikipedia).

In the last two months, since the start of the fourth quarter of 2011, UAE-based companies have rushed to the international debt market to offer both conventional and Islamic bonds. At last count, as much as USD 5 billion of bonds have been placed on the market, with a similar amount being considered for issue. Companies from oil-rich Abu Dhabi have led the rush. A three-tranche USD 3.75 billion issue by International Petroleum Investment Company opened the floodgates. Union National Bank sold a USD 400 million five-year bond, followed by Abu Dhabi Commercial Bank‘s USD 500 million five-year Islamic bond issue and Abu Dhabi Islamic Bank’s USD 500 million five-year sukuk.

Waiting in the wings is Abu Dhabi National Energy Company, or Taqa, which said it could issue bonds after meeting with investors in Asia, London and the US. The company is looking at various options to refinance USD 1.5 billion worth of debt due by the end of 2012. Also in the fray is Dubai-based lender Emirates NBD, which is considering a five-year sukuk issue. The bank has about USD 2 billion of debt maturing in 2012.

Clearly, these companies are seeing a window of opportunity before global economic growth implodes even further next year, making the prospects of raising debt grimmer and more expensive. The Paris-based Organization for Economic Co-operation and Development has warned that the deepening sovereign debt crisis in the Eurozone will result in waves of bankruptcies and wealth destruction across the 17-nation bloc, which would also have a severe impact on Gulf economies.The 34 OECD nations will grow 1.9% this year and 1.6% in 2012, down from 2.3% and 2.8% predicted in May, the OECD said in an unusually stark outlook report.

The slew of debt issues from the UAE have received reasonably strong credit ratings. Prices at which some of the issues have been placed are also relatively attractive. This is because crude prices — which form the mainstay of the UAE’s economy — remain in the region of USD 100 per barrel. Next year, crude may take a beating due to reduced demand from slowing economies worldwide, and threaten to strain the fiscal positions of the exporters. The reasons for raising these large amounts of debt are also clear. They range from refinancing maturing debt to funding operations and even expansions and new joint ventures. Get the cash while it is still available cheap, seems to be the paradigm for this rush to debt. This implies a higher level of maturity among the UAE’s corporate entities when it comes to raising and managing finance.

— Yazad Darasha

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Posted in: Corporate