Two issues in the Gulf's international bond market this week show a panic over low oil prices has faded and foreign investors are once again willing to buy into the region's debt - but they remain extremely sensitive to pricing. The market froze up in the final quarter of last year as oil prices plunged below $30 a barrel, raising fears about the viability of Gulf economies in an era of cheap crude.
Since then, oil has rebounded to around $40 and the six Gulf Cooperation Council governments have introduced austerity steps to curb their budget deficits. Most GCC currencies have rebounded in the forwards markets, showing investors no longer think devaluations may be imminent. Improved sentiment was seen in the response to a $500 million, five-year debut bond this week by Qatar's Ahli Bank , which attracted a sizeable order book of around $1.2 billion - the kind of total seen before mid-2015, when low oil prices began to shake confidence in the Gulf.
A benchmark five-year sukuk sale by the Jeddah-based Islamic Corporation for the Development of the Private Sector, which opened on Tuesday, took an additional day to close, however, and was trimmed to $300 million from the $500 million originally envisaged. The contrast suggests that while demand has returned to the Gulf bond market, attitudes to pricing are very different than they were before mid-2015. "Demand for Gulf bonds has improved following stabilised oil prices, general improvement in the outlook for emerging market credits, better regional government finances, and dividend distribution increasing liquidity in the hands of regional investors," said Chirag Doshi, senior vice-president for investments at Qatar Insurance Co.
"But investors are increasingly price-sensitive because there is still much uncertainty around oil prices." In mid-January, the emirate of Sharjah reopened the Gulf market after a three-month lull by raising $500 million in Islamic bonds. A handful of issuers followed, including Bahrain's government, Kuwait Projects Co and the Jeddah-based Islamic Development Bank, but deal flow was sporadic and order books were small.
The Ahli Bank bond, with a guarantor rating of A+ by Fitch and A2 by Moody's, suggests demand has returned to healthy levels, which could encourage a series of new issues in the region. On Thursday, Kuwait Food Co But ICD, which set its initial pricing guidance at 125 to 130 basis points over mid-swaps, printed at the wider end of that guidance after attracting orders of less than $500 million, mainly from lead managers, a source familiar with the matter said. ICD's aggressive initial pricing might have been accepted early last year, when low yields in emerging markets made investors desperate for Gulf debt at almost any price, but that is no longer the case. An October 2020 sukuk from Saudi Arabia-based Arab Petroleum Investments Corp, which like ICD is rated Aa3 by Moody's, was trading at 155 bps over its Z-spread on Thursday.