Investors from outside the Gulf have muscled in on two big bond issues from the region, taking very high portions of the debt on offer - a sign of international confidence in the region, but a source of frustration for some locals who wanted to buy more.
Just 43 percent of Bahrain's 10-year, $1.5 billion sovereign bond, issued last Wednesday, was placed in the Middle East. Thirty-two percent went to investors in Europe including Britain, 14 percent to the United States, and 11 percent to Asia, according to official data.
By contrast, 63 percent of Bahrain's last international debt market outing, a seven-year, $750 million sukuk in November, was placed in the Middle East.
And Middle Eastern investors were allocated just 19 percent of last week's other big bond deal in the Gulf, the seven-year, $500 million issue from Dubai-based mall developer Majid Al Futtaim Holding.
Britain took 36 percent of MAF's bond, Europe 25 percent and Asia 20 percent, leaving regional investors who wanted to diversify their portfolios with one of the Gulf's very few privately owned, investment-grade credits to pick it up in the secondary market. In comparison, MAF's debut international issue, a $400 million sukuk sold in February, saw 54 percent allocated to the Middle East.
Local allocations may have been higher for the earlier issues of both Bahrain and MAF partly because those bonds were sukuk, and therefore attracted large pools of Islamic investment funds based in the Gulf.
Even so, the increase of international investor interest in Gulf issues over the last several months is striking, and reflects a growing perception of the region as something of a safe haven, given the low debt levels and comfortable budget surpluses of most of its governments, analysts said.
The safe-haven perception has extended even to Bahrain, which is running a budget deficit and faces serious social unrest. Foreign investors appear to have accepted the common perception in the Gulf that for geopolitical reasons, Saudi Arabia will continue to use its deep pockets to support Bahrain economically and politically if needed.
"As the situation in Europe continues to go from bad to worse, investors are nervous, and we see them pay even closer attention to the Gulf bond markets," said Chavan Bhogaita, head of the markets strategy unit at National Bank of Abu Dhabi.
"The key rationale is simple - they are looking for opportunities to diversify their exposures away from Europe. The low correlation to current European issues, the underlying credit quality, and the yields on offer are compelling."
While Gulf investors are encouraged by the growing foreign interest in the region's market, which could improve liquidity, they see a risk of a negative impact: given the limited supply of new paper in the Gulf, severe shortages could develop for popular issues, which might become overpriced.
"It's annoying. We have been busy buying the bonds in the secondary market due to the skewed allocations. The low distribution to Middle East ensures that the deal is supported in the secondary," said one regional debt trader.
Bahrain's new 2022 bond, issued at a price of 99.867, traded up to 100.55 on Friday, while the MAF bond rose from par to 100.90, traders said.
So far, however, the signs are that issuers and lead managers are unlikely to cut back on their allocations outside the region just to please Gulf investors. For pricing and reputational reasons, issuers are happy to attract heavy international buying; in Bahrain's case, the heavy take-up from Europe appears to disprove any suggestion that the kingdom is dependent on Saudi investors to raise money.
"We were conscious that the issuer wanted to diversify the book as much as possible and from that perspective, it was a success," said one banker who worked on the MAF transaction.
Nick Stadtmiller, head of fixed income research at Emirates NBD, said international participation in Middle East bonds would rise further if the region could produce a bigger range of issuers.
"There is a relatively small core group of international investors who understand the GCC (Gulf Co-operation Council) fixed income space and have risk allocation to the sector," Stadtmiller said.
"Going forward, a wider base of bond and sukuk issuers in the GCC would provide both diversity and larger scale in the market, which could entice more global investors to consider investing here."
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