NMI_GCCRoundtable 2019

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New Markets Investor
Q2 2017

Q2 2017
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New Markets Investor

Q2 2017
a CMC Production
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New Markets Investor

Q2 2017
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New Markets Investor

Q2 2017
GCC debt issuance expected to swell in
2017 as governments and corporates seek
funding
At NewMarketsInvestor roundtable in
Dubai in May hosted by Standard Chartered, leading
participants discussed the steps needed to take the
region’s debt capital markets from nascent to mature, to
ensure that they can continue to function, whatever
happens to the oil price
Roundtable Participants
Tom Koczwara, director, debt management office, Government of Sharjah
Thuwaini Al-Thuwaini, executive manager, investment banking group, Warba Bank
Mike Wallace, director of corporate finance and treasury, Aldar
Zeina Rizk, director, fixed income asset management, Arqaam Capital
Mohieddine Kronfol, chief investment officer, global sukuk and MENA fixed income,
Franklin Templeton
Salman Ansari, regional head, capital markets Africa and Middle East, Standard Chartered
Sarmad Mirza, executive director, debt capital markets, MENA, Standard Chartered
Dima Jardaneh, executive director, head, MENA economic research, Standard Chartered
James Anderson moderator, NewMarketsInvestor
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Q2 2017
Middle Eastern governments and companies rose to
the financial challenge set by falling oil prices in 2016,
rethinking their operations, cutting costs and turning
to the international bond markets in committed fashion
to plug funding gaps. Issuers in the Gulf Cooperation
Council countries raised $66bn last year, and 2017’s
first quarter total of nearly $25bn suggests this year’s
issuance will be similarly high.
NewMarketsInvestor: Gulf borrowers have a
lot to raise this year in the international debt
markets. But there are headwinds: a new US
president, disappointing global growth, rising US
interest rates and geopolitical unrest, to name
but a few of the known issues we have to face this
year. Yet the capital markets are still enjoying
exceptionally bullish conditions. Gulf issuers have
had an excellent 2017, so far. Can it last?
Mohieddine Kronfol, Franklin Templeton: We’re
in a much better situation than a year ago when oil
prices were south of $30 a barrel and people weren’t
confident that we would be able to implement any of
the structural reform or fiscal consolidation measures
being announced. Globally there was a very optimistic
outlook for the US, but a fairly pessimistic
outlook for Europe, emerging markets and the rest of
the world. Today the optimistic outlook for the US
may still be there but it is a little more challenged.
Europe has done much better and China and the
emerging markets have been doing better with the
recovery in commodity prices.
In this part of the world we’ve seen an improvement
in oil prices, where the downside risk seems to have
been diminished by the OPEC agreements, and
governments have done a very impressive job with
implementing fiscal consolidation.
I expect between $50bn-$60bn in total international
issuance. Also investor demand will be there, with
this window lasting for the next couple of years.
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New Markets Investor
Dima Jardaneh, Standard Chartered: For Gulf issuers
and their external funding needs we see
two distinct routes. For Abu Dhabi, UAE,
Qatar, Kuwait, funding needs may have
peaked so there might be more opportunity
for corporates in that space. But Oman,
Bahrain and Saudi Arabia may still need
to raise funding in similar amounts to last
year.
Mike Wallace, Aldar: I think it’s mainly
risks around how relevant the region is in
terms of fixed income for investors, and
that will be primarily driven by rates in the
US. As soon as yields start lifting there,
then the relevance of the GCC and emerging
markets becomes less, and the money
just flows back.
Zeina Rizk, Arqaam: The identified risks
from last year, which were recession risk
in Europe, China’s hard landing, US economic
slowdown and oil dropping further,
didn’t materialise. The two risks that
actually were considered as highly unlikely
both materialised: Brexit and Trump. Despite that,
emerging markets had a good year, and a very strong
start to 2017.
If you had asked me in Q4 last year, I would have
said rates can’t stay here. Yields should move higher
and the curve is going to steepen. However, now
there is a greater uncertainty with regards to yields’
trajectory.
Trump came into office with the agenda to ‘make

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New Markets Investor
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Q2 2017
America great again’. The fact that the Healthcare
Bill didn’t pass shows that he’s not as strong as markets
perceived him to be, which puts a question mark
on the magnitude of the fiscal plan that he’s going to
be able to pass. This being said, the reflation trade is
on hold for now, the risk of the 10 years blowing out
is reduced; and short term rates are contained.
I think the 10 years will trade within a 2.3%-2.5%
range, which is going to be supportive for the market.
GCC spreads are at tight levels compared to
their historical levels. However, if you compare the
GCC to other markets, mainly Asia, the region still
looks attractive.
NewMarketsInvestor: Dima, how long can the
good market conditions last, and what is Standard
Chartered expecting in terms of rate hikes
this year?
Jardaneh, Standard Chartered: We believe that
the market was somewhat complacent on, or extra
euphoric on, Trump policies. We have been more
cautious on the impact of the Trump administration’s
economic plans and we didn’t necessarily expect
the fiscal stimulus to be of the size that the market
was pricing. We’re expecting there to be another two
hikes this year, and another two next year.
Increases in the Fed Funds rate may not translate to
a meaningful pick-up in longer term yields, that is if
the reflation story disappoints and inflation does not
rise meaningfully in the US. At the current juncture
of the US economy, there is a possibility that inflation
will just really not pick up to a high extent, and
so the market will become less and less euphoric and
hence yields will probably be capped at much lower
levels.
NewMarketsInvestor: We’ve talked about external
factors impacting the region, but what about
specific GCC concerns?
Kronfol, Franklin: It is relevant to make clear to
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Q2 2017
policy- makers that it would be a big mistake, from
a systemic point of view, to continue to rely almost
exclusively on trying to attract foreign funding.
It is almost impossible to figure out what is going to
be driving that sentiment. One day it is Brexit, then
Trump. The next there could be an Asian financial
crisis. Every time we go through these different taper
tantrums there’s a risk. So far, we’ve been able to
deal with this because the liquidity domestically has
been so strong, and banks have been able to absorb a
lot of this volatility and step in, buy debt and anchor
these markets.
But as the market grows and develops, we need
to focus on generating or building a local demand
base outside of the banking system. And that means
promoting inward investment, promoting local asset
management, promoting insurance and pension
companies.
We need to prioritise non-bank investors in these
markets because when times are good people focus
on the upside and the potential, and think how
attractive we are. If we want the GCC bond markets
to remain resilient and to attract foreign investors
year in and year out, we need to have that resilience
embedded structurally.
Tom Koczwara, Government of Sharjah: Governments
in the GCC have not seen market development
as a main objective. We may have talked about
it, but we haven’t actually done it. We have used
issuance as a way of raising funds to plug budget
deficits and to pay for projects. That is a relatively
immature way to approach government borrowing.
It means that, from the perspective of higher volumes
of issuance, we remain dependent on a volatile
global market.
The GCC market is seen as self-contained from a
global perspective, and it is so tiny. It’s just a flea
on the back of the debt capital market dog. We talk
about Trump and Brexit fluently but are reluctant to
talk about local factors.
Even in these bumper deals, where are the biggest
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Q2 2017
Tom Koczwara
Government of Sharjah
orders from? The GCC.
The big questions for us are whether governments
can find the right balance between raising funds,
supporting financial markets, generating economic
growth and controlling fiscal deficits.
And these conflicting or competing objectives will
drive the shape of the market and the quality of sovereign
credits, and therefore the rest of the market
beneath that, over the next two or three years.
NewMarketsInvestor : How are you as a sovereign
issuer trying to help to address these aims?
Koczwara, Sharjah: In some ways, we’re more like
a corporate. We’re not going to be driving the market.
But the advantage we have is that we’re inside
the tent, so we do get to have these sorts of discussions
with the bigger brothers, in terms of policy
making.
We expended a lot of negotiating capital in the better
times trying to push for development of local debt
capital markets, local currency debt capital markets,
which is one of the key steps in developing a deeper,
more liquid, more predictable debt capital market
in the region.
As an issuer, I think we are very focussed on our relationship
with our key investor base, which is here
in the GCC.
NewMarketsInvestor : So how important is the
local investor base, and how can that be
harnessed to further develop the GCC markets?
Rizk, Arqaam: I agree that the local investors are as
important as the internationals, but we have a chance
of attracting new money, which we need. The GCC
market is very much a one-way market. Everybody’s
buying and no one wants to offer, or everybody’s
selling and no one wants to buy. Attracting a larger
investor base may normalise the market and we may
start seeing proper two-way flows and a more mature
market.
The growth in the regional capital markets last year
was significant and the inflow of international funds
increased accordingly. This leaves us with the risk
that the usual backstop of the regional markets, the
local bid, won’t be able to absorb all this liquidity.
The flipside of this is that the Asian buyers are arguably
buy and hold accounts and therefore they will
not be dumping as heavily as we would expect them
to.
Kronfol, Franklin: To be really significant, you need
to develop the local capital markets, and you need to
dis-intermediate the banks.
If you look at the loan market, it’s also substantial.
If some share of that market could be captured, the
bond market could be north of $150bn a year. Then
issuers would start to be included in indices, do more
144A trades, and place more deals internationally.
That’s just the dollar side. If you can mobilise the
domestic market too, the whole block becomes more
significant.
I’d like to see insurance companies in the region buy
our paper in size. When I look at our insurance companies
buying real estate I find it worrying.
We’re beginning to get insurance companies and
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New Markets Investor

Q2 2017
Salman Ansari
Standard Chartered
other large investors who want to farm out fixed income
mandates. But still, it’s very small considering
the potential size of capital markets, the size of GDP,
or compared to the level of savings.
We need better regulation and more effort to promote
financial services. A proper market is a function
of different investors having different investment
objectives, not about all buying or all selling.
A bank looks at things differently than an insurance
company, different than a private bank, different
than an asset manager. That is what makes a market
become more efficient.
Koczwara, Sharjah: I don’t think people have
realised just how lucky we are at the moment; that
we’ve just got this huge Kuwaiti deal, and last year
we had the huge Saudi deal, and so on. We are so
fortunate that global market conditions allow us to
do this. If the fall in the price of oil had coincided
with more difficult global liquidity conditions we
would have been absolutely stuffed. Our tendency is
always to think that was a job well done, that there’s
nothing to worry about. But that’s not the case at
all, actually. We need to plan for next time we have
a sudden fiscal gap, in case markets at that time are
less accommodating.
Kronfol, Franklin: Yes, when this happened to us in
2009 and 2010, the GCC could barely borrow, while
Egypt was able to do all their financing in the local
market.
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New Markets Investor

Q2 2017
Thuwaini Al-Thuwaini
Warba Bank
NewMarketsInvestor: Can you foresee a situation
where that happens again? Markets have
moved on, and the likes of Saudi Arabia have
created these large liquid benchmarks. Will
these help with returning access?
Koczwara, Sharjah: If oil goes back to $90, Saudi
perhaps won’t issue again.
Kronfol, Franklin: There’s limited credibility to
the idea of Saudi maintaining a dialogue with fixed
income investors. It’s like them talking about wanting
to be leaders of Islamic finance when they still
haven’t closed a single sovereign sukuk until now.
The market’s grown to $400bn, and I’m yet to see
the Saudi government be proactive in structuring
and issuing Sharia-compliant securities.
Jardaneh, StandardChartered: But I sense there
might be a shift in Saudi from thinking of the capital
markets as just a means of filling a fiscal gap to
looking at a more holistic approach.
Rizk, Arqaam: Exactly, the GCC sovereigns issued
because they needed to, not because they want to
develop and support the capital markets. As such, if
the situation gets better, the capital markets will not
be a priority anymore and we will go back to the
situation of discontinued GCC sovereign curves.
Kronfol, Franklin: Yes… but up until a year ago, it
was never really fixed income securities that were
envisaged. A seed has been planted but I still feel
like, across most of the region, we have a strong
equity culture with a limited focus on debt markets.
The development is driven by the private sector,
by banks, by issuers, by a few companies. But you
don’t feel that there’s a policy response there.
We need a holistic policy framework that encourages
the development of non-bank financial services
and bond markets.
NewMarketsInvestor: OK, let’s look at a specific
example. Thuwaini, what drove Kuwait to
issue this year?
Thuwaini Al-Thuwaini, Warba: When you dig
deep enough, you see that there is no real necessity
[to fund]. Despite all we hear about fiscal deficits,
leverage, for countries of comparable ratings,
they’re still way below the median when it comes
to the debt-to-GDP ratio.
Using Kuwait for example. Did it really have a
fiscal deficit? What it reports is oil price versus an
assumed fiscal break-even budget oil price per barrel,
which they assumed at $45 per barrel.
The KIA has assets of around $600bn-$650bn. You
have the Future Generations Fund, which is speculated
to be around $380bn. You have the General
Reserve Fund at $250bn. So you’re talking about a
country with over $1tr in assets outside of oil.
So, why did Kuwait end up issuing? Does it really
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Q2 2017
have a problem? No. It went with the flow and the
trend being followed by the other GCC members.
And it feared that non-conformity would negatively
impact the local market, specifically, local Kuwaiti
issuers trying to access the international debt capital
market, without having a benchmark to guide
pricing. Outside of Oman and Bahrain there isn’t a
necessity to fund fiscal deficits by the other GCC
members. Even Saudi, you don’t know what the
actual requirements are. I think Saudi has taken a political
decision that it wants to be more independent,
to be less reliant on US policies, and on foreign policy.
I’m highly sceptical that Saudi’s decision to tap
the debt capital markets is driven by fiscal deficits
as much as it is driven by the aspiration to position
itself to be more independent of its long-standing
Western allies.
Rizk, Arqaam: Kuwait is the exception, I think. It is
the only GCC sovereign that issues because it can,
not because it needs to.
NewMarketsInvestor: How can you encourage
non-bank investors in the region to participate?
Kronfol, Franklin: The banks may be providing all
the necessary capital, but if you look at private credit,
or SMEs, there is a massive funding gap there. It’s
$70bn-$150bn, depending on estimates. You should
encourage that sort of funding because it drives employment
and economic growth.
Governments try to get banks to plug that gap but
they end up mis-pricing it, and not doing so well.
They’re not really geared towards it. If you want to
promote the private sector, you need to specialise in
lending to private credit. There is a consequence to
relying on the status quo.
The banks could be a stabilising influence when
they’re doing well. But when they’re not doing very
well, they can, and have in the past, become a liability.
Koczwara, Sharjah: The driving force needs to be
at an even higher level. It’s the tension between the
closed economy, the kind of model that says ‘we’ve
got all the money; we’ve got all the oil; we own all
the banks therefore we’re fine’, versus the more open
economy like Dubai. Dubai is the pioneer of the
open GCC economy. Which one is more successful
in delivering economic and social development for
its inhabitants? Most people will say Dubai is ahead.
So the most successful model is the open model,
which depends on attracting capital, talent and permitting
competitiveness.
Rizk, Arqaam: It makes you more vulnerable to
external shocks; which is not necessarily negative
when seen from a high risk, high return perspective.
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Q2 2017
Koczwara, Sharjah: Day-to-day it makes you more
open to external bumps in the road, but long term, it
allows you to build diversity and resilience. The biggest
shock we’re going to face is when people stop
wanting to buy oil.
It feels that the UAE is the only country that can lead
this. We need to promote openness to capital flows;
encouraging competitiveness in the banking sector;
encouraging the development of a proper insurance
sector, which is not cross-subsidised by real estate
.
As policymakers, we need to think in both the good
and the bad times, how do I focus on that long term
goal of developing a more open and diverse economy?
You see some good examples of that. Clearly,
Saudi is trying to take the bull by the horns and
setting up a planning ministry.
Al-Thuwaini, Warba: The regulator has a lot of responsibility
in driving a deeper debt market, but for
some reason they are not. One thing that always puzzled
me is that you don’t have to reinvent the wheel
here. Look at Malaysia. It did not focus on international
money for its development. Yes, attracting FDI
was a factor. But because it is a ringgit economy, it
focused on developing a local debt capital market
to help it withstand any international shocks, which
can adversely impact its local economy. I don’t think
even the UAE has accomplished this yet.
The first serious step in establishing a robust debt
capital market is that we establish a local rating
agency which caters to the nuances of the local industries
because you can’t compare the rating of our
companies to, say, blue chip companies in the US,
Europe or Japan.
Salman Ansari, Standard Chartered: While encouraging
non-bank investors is a critical next step, to
date regional issuers have managed to successfully
place primary issuances with relative ease. Looking
at last year, when the region saw challenges associated
with the oil price crunch, some market participants
questioned whether GCC issuers would easily
be able to raise funding at price-efficient levels. Yet
if you look at the 150- plus deals that were completed
last year across both public benchmark and
private placement transactions, the market did not
see a single failed deal.
NewMarketsInvestor: So clearly there needs to
be a change at government level, but what about
corporates, are bank loans still a more attractive
funding option?
Wallace, Aldar: The first observation I made, having
moved over here from the UK a couple of years ago,
was that we can borrow from our banks far more
cheaply than we can on the debt capital markets. At
least 50% of our debt is from bank loans, which we
can get out to 10 years, so if I can get that, I’ll take
it. Bank debt is more flexible. It’s cheaper to arrange.
I can work on the relationship side of things. I don’t
have distant investors who maybe aren’t so flexible
or accommodating to change. But everything I know
from back home says this is wrong, this isn’t how
efficient capital markets should be working. But, as a
corporate, you know, you’d take it all day because I
can’t change it. But it can be risky and more volatile.
Kronfol, Franklin: I don’t think you’d be extended
the same privileges if you were an independent
corporate.
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New Markets Investor

Q2 2017
Mike Wallace
Aldar
Al-Thuwaini, Warba: I think you really hit it on the
head there. The difference is that there is a scarcity
of quality credit in the private sector. And those that
are of quality usually are long-standing merchant
families, or quasi-government entities with some
support from the government sector.
If we go to one of our clients and say: ‘well, instead
of giving you a 10 year facility, we’ll take you to the
debt capital markets’, that’s business I’ve lost for the
next 10 years from this corporate, because what I’m
doing essentially is not using my balance sheet and
that is very challenging for us to replace. So, if I turn
over my balance sheet, I’m going to have a big
problem maintaining my business. Most banks that
continually aspire to grow their balance sheets find it
challenging to replace bankable credit.
Wallace, Aldar: The irony is that the people who are
buying my notes are the same people providing the
loans, the banks.
Ansari, Standard Chartered: Undoubtedly there is
a dichotomy between what the international debt
markets will offer versus lending rates available
locally. In particular, high yield issuers who look at
the possibility of approaching the international debt
markets with yields at high single digits will often
find their local bank partners offering them mid-single
digit loan pricing. This is a key reason why we
have not seen any meaningful growth across the high
yield sector in the region. The availability of cheap
lending rates is even more prevalent at the higher
end of the rating scale. This is a key reason why
the region’s DCM volumes remain dominated by
sovereign and bank issuers, while corporate volume
averages between 10%-15%.
NewMarketsInvestor: So if there isn’t a pricing
benefit, how can you encourage issuers to turn to
the capital markets?
Rizk, Arqaam: You’re right on the differential and
that the banks are the go-to for lending, but the first
step is-for sovereigns to have a curve, to set a benchmark
for the corporates. The next step should come
from the regulators. They should incentivise corporates
to turn to the capital markets when funding
is needed. A head of treasury won’t choose to raise
funds in the capital markets for the general improvement
of the markets. He would only do so if it makes
economic sense for him and so far, banks are being
more competitive and that is where the regulator
should have a role. Step four is to encourage the
construction of indices and ETFs.
Kronfol, Franklin: If you just left it to market forces
or the private sector you can’t compete with the
banks when they’re so big, and they have entrenched
relation- ships, and government backing, with an
interventionist policy. It’s almost impossible to circumvent
and that’s why there’s no consolidation.
We in the GCC have a history of using government
funds to kick-start industries, whether it’s airlines,
or telecoms, or logistics. I think the same should be
done, especially with pension funds; especially with
insurance companies. Those would play a big role in
trying to create those domestic pools of capital that
can then compete with the banks and provide different
types of funding. Sharia-compliant finance is a
very good innovation to be leveraged as well.
Ansari, Standard Chartered: But we are seeing
some very positive developments, particularly versus
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New Markets Investor

Q2 2017
Sarmad Mirza
Standard Chartered
the last two years. We’ve seen the GCC sovereigns building curves, which can
be easily leveraged by other GCC issuers. We have also seen non-traditional
investor participants becoming more active, such as the US base on the
back of the sharp rise in 144A issuances. The Asian investor base has
also been a large contributor to the growth of volumes. But sustaining
this proactive attitude towards the international debt markets
is critical to giving international investors confidence that this
is not a one-off approach, and if oil prices rise then local GCC
issuances will shut down. The development of the local market
is also very important. At the moment, we only have one
major investor – the region’s banks. Even with over 300
transactions in the last two years, we’ve been very reliant on
domestic liquidity, which still represents 50%-60% of most
GCC order books. More importantly, these books have been
anchored by a small range of anchor investors, which are the
mega-banks of the region, and international investors have
come to rely on this. While a core focus must be to expand
the non-bank investor base, I do think this may be subsided
by the fact that Asia is coming in and driving a lot of these
deals. But we need to get away from the over-reliance on this
domestic liquidity.
NewMarketsInvestor: How important is the Asian bid for
the GCC?
Ansari, Standard Chartered: On average over the last two years,
Asian investor participation in GCC deals has more than doubled.
Some of this growth comes from the continued relative value differential
seen between similarly rated issuers from the GCC versus Asia. This
increased interest from the Asian market is opening up interesting avenues
— of late we have even seen, for example, select Taiwanese investors looking
more closely at sukuk formats — a welcome investment in the region.
NewMarketsInvestor: Where are the pockets of demand coming from, apart from Taiwan?
Ansari, Standard Chartered: We have seen a healthy pick-up in interest from markets such as Korea, Singapore,
Hong Kong and Malaysia. New markets like Thailand have also been showing increased interest, with
participation in both public and private formats.
Asian interest has been so strong that many ‘myths’ that existed in the market are now proving false for
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Q2 2017
Zeina Rizk
Arqaam Capital
example, the myth that Asian investors only look at rated products. If you look
at the most recent transactions — including those that are unrated — Asian
distribution has increased twofold versus the last five year average. Asian
investors are looking actively at this region and historically what we
perceived as no-go areas for them — such as unrated credits —
are of strong interest now. You’re seeing those boundaries being
pushed. In addition, we’re seeing new pockets of non-deal roadshow
locations being explored by GCC issuers. Historically,
issuers only targeted deal-related road- shows, going to Hong
Kong, Singapore and London, and pricing the deal in London.
Now you’re seeing issuers travel on a non-deal road-show
basis to keep investors educated on their credit story, while
also targeting new markets like Taipei or Seoul. A lot of regional
borrowers have gone to Taipei and Korea of late. This
is adding to the diversification element of transactions.
NewMarketsInvestor: Are you looking, Tom, at the Asian
market?
Koczwara, Sharjah: Yes, we’d look at some of the market-specific
products, whether it’s Formosa or Panda bonds,
or others. Some of these options are attractive in some ways,
less attractive in others. They’re not straight- forward. There’s
a relatively high degree of execution risk.
When we market a standard or sukuk issue, or through the private
placement market, or indeed the loan market, we have seen some of
these Chinese banks in particular being, I was going to say proactive
— probably more than that — pushy even. They work a bit behind the
scenes so you don’t get a sense of how active they are. They don’t really
have a general banking platform, but they’re coming and writing some huge
cheques. They are the biggest banks in the world in terms of balance sheets and
they can make a big difference to this market and put pressure on the traditional big
ticket lenders in the GCC.
On the one hand, for Chinese lenders, there can be a restriction, which is they need a Chinese angle
to get things signed off back home. On the other hand, they are keen to do deals and to build their book.
As a result, the people on the ground here are flexible in terms of what that Chinese angle can be.
NewMarketsInvestor: Turning to practical examples of market access, what about our issuers’ funding
plans for the year?
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New Markets Investor

Q2 2017
Many investors (notably in Asia, but also in the US
and Europe, where interest rates are low) have been
willing to increase their exposure to GCC sovereigns
and banks, due to the high credit ratings and good
yields, and this is set to continue as they
both issue according to Fitch Ratings.
Mohieddine Kronfol
Franklin Templeton
Koczwara, Sharjah: We’ve got financing requirements of around
Dh3.5bn ($1bn) which I expect to be made up of one or two large
transactions of multiple hundreds of millions of dollars, plus two
or three smaller transactions. For the large transactions, we’ll look
at different options. So we have people marketing quite innovative
markets that we should go and issue into.
In addition we’d consider a repeat of our previous debt capital market
sukuk issuance, which we’ve done twice before.
For the smaller transactions, either we’ll look for our traditional
bilateral banking relationships or at private placement opportunities
that normally come from pro- active investors. That’s for
the government itself. Then we also have 19 government-owned
entities that we manage the financing for. There, we’ve got a big
focus on export credit agencies and guaranteed or direct funding
from foreign governments for exporting countries. We see that as
the most attractive source of low cost long term finance, and it’s a
big growth area for us. We just closed our first export credit deal in
January, and we’ve got six or seven which we’re working on. More
generally, across the GRE (government-related entities) sector,
we’re consolidating. I think we will end the year with less GRE
debt on a net basis than we started the year.
Wallace, Aldar: Our next priority is looking at our December 2018
sukuk, which is $750m. So we’re thinking about how we deal with
that. We’re also looking at our capital structure. We are a pure play
developer on one side, and an asset manager on the other. And
the capital structures for those businesses are very different. But
because we are one entity, we need to maintain an investment grade rating. And I’m pleased to say we’ve
been upgraded over the last 12 months. But it means that one business compromises the other. And so we’re
thinking about how we manage that. In that context, refinancing a sukuk is not simple. We are thinking
about whether we can create some sort of structure that allows us to efficiently issue the sukuk in the right
sort of format, in the right entity with the right structure for investors.
The sukuk/conventional debate is an interesting one. As a real estate company, we have assets. But it’s not
necessarily as simple as that. We have land that we need to develop — so we need flexibility and freedom
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Saudi Arabia’s first international bond issuance
valued at $17.5 billion in October last year was the
biggest recorded emerging market bond, far
outpacing the previous record of Qatar’s $9 billion
sovereign bonds issued in May 2016
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New Markets Investor
around that — Sukuk has the provisions of being
flexible in moving things around, but it’s not
necessarily an easy process. We have operating
assets, so maybe we could look at those instead.
But we need to work out if they are fully sharia-compliant
in all areas. Hotels, as an example,
may not be.
We need to make sure that whatever structure
we go into is as simple, efficient and flexible as
possible and that if there is a meaningful pricing
difference of being in a sukuk then you need to
consider that sukuk maturity profiles are different
to conventional profiles. So we factor in all this
before deciding which route to go down.
NewMarketsInvestor: Is refinancing risk in the
region a problem?
Wallace, Aldar: The $750m sukuk is half of our
debt at the moment. But we’re not highly geared
so I’m not concerned about the financing.
Koczwara, Sharjah: You are quite typical of issuers
in the region. There are a lot in the sovereign
and corporate sectors who do nothing, do nothing,
do nothing, do a huge issuance, do nothing, do
nothing, do nothing.
Wallace, Aldar: But it goes back to the bank capital markets question. Half of my current debt is with the
banks, which I wouldn’t normally do, by which I mean I wouldn’t normally structure my long term debt
with 50% in bank debt. I’d have an RCF with a bunch of banks, and then the rest would be capital markets
and then I wouldn’t have the maturity cliff I’m facing now.
Koczwara, Sharjah: I’m sure there are a hundred solutions to it but this is one of these risks that is created

Q2 2017
by the state of the market, essentially.
Wallace, Aldar: We did a 10 year last year with one
local bank, which was really pushing them. They
did it at pricing levels that were probably inside
those available from the capital markets. But that’s
the problem. The banks are feeding companies like
Aldar because it’s easy to do so. As a bank, you
don’t need to do all the work you’re going to have to
do for small and medium size businesses and it’s less
risky. You can just give the money to Aldar.
Sarmad Mirza, Standard Chartered: It certainly is
and can issue sukuk and bonds 50bp within what
you [the banks] can lend me, then you’ll be forced
to look at that market because you won’t be able to
lend to me.
NewMarketsInvestor: With such large sovereign
funding needs, is there a risk of crowding out
smaller issuers in the region?
little surprise in the debt capital markets sphere how
the longer maturities have become the strong preference
of investors. One thing we hear from every
investor is the need for more yield.
In addition, one of the themes we have been trying
to drive in our capital markets platform in the past
couple of years is to try and encourage the middle
tier names to come to the private placement market.
However, even now, when we go to bank investors,
who are the key players in the regional private placement
market, they still express concerns around the
unrated nature of an issuer, or that they’re single-B
or double-B credit rated, or the sector that the issuer
is in. The investors often question if it is really worth
doing the work for a smaller sized, unrated or high
yield deal.
Wallace, Aldar: The efficiency of the market needs
to change. Because if one goes to the capital markets
Koczwara, Sharjah: A slightly more mature approach
would be good. But the second point I was
going to make is one of my most painful experiences
in the government of Sharjah, one we discussed already,
was the transparency journey. The other one is
convincing my organisation to do less business with
our local banks and forcing them to work with the
private sector in Sharjah.
It’s so easy for us to rely on our local banks. Funding
is available the next morning and we can put our
feet up for the rest of the month. But if we step back,
they will be forced to lend more to the local SMEs
and, indeed, larger corporates. This is the life- blood
of our economy: we’re the most private sector- driven
part of the UAE. And you find that some of the
banks tend to be very volatile in their appetite when
lending to this sector. They come in when times are
good and then suddenly, they step back and close all
of the SME accounts in the UAE overnight. We need
our local banks to be supporting the private sector.
But it’s incredibly painful to get people to think that
way.
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Kronfol, Franklin: That’s exactly how you could encourage
the banks to do more plain vanilla banking.
If you or the government or GREs were all told that
X% of your funding needs to come from international
markets.
NewMarketsInvestor: Mike, how would this
work in practice for you as a borrower?
Wallace, Aldar: I agree that a regulator needs to promote
and emphasise this but if you start setting hard
thresholds of what you can do, I’m not sure that gets
you there.
To your earlier points about having institutions like
insurance companies and pension funds bringing
financial sector with shares issued in the form of a
grant to Kuwaiti nationals. It was also one way for
the government to redistribute the country’s wealth
to its citizens.
The first few years were set-up costs. So we accumulated
some negative reserves, negative retained
earnings. By the time we wanted to issue, we
couldn’t by law, because we had to recover the
accumulated losses before issuing capital again. We
couldn’t raise equity capital. We witnessed new bylaws
issued by the capital markets authority in late
2015, allowing sukuk issuances. If it wasn’t for this
positive regulatory development, I don’t think you’d
have seen Boubyan issue, thereafter AUB, and then
us as the third bank.
capital: that will make the capital markets more
efficient, better priced and more competitive to the
banking sector, so that they’re forced to look at different
avenues.
I’m going to struggle and you’re going to struggle
to go to our boards and say, ‘no, we’ve got to take
money from this more expensive group over here because
it’s better for the rest of the economy’. They’re
just not going to do it.
NewMarketsInvestor: Thuwaini, what was your
experience of issuing the sukuk recently? Would
you do it again?
Al-Thuwaini, Warba: Our options were limited.
We’re a bank that was in a unique position. We’re a
newly created bank. Our licence was granted as part
of an initiative of the government to promote the
The primary reason for the success of the issuances,
despite the overload of challenges, was demand and
supply. Demand for sukuk in the market far surpassed
supply, coupled with the perception of quality
credit and the chunky yield the issue promised.
We achieved our target, which was to pick up on the
momentum of the debt regulatory changes, the lack
of supply in Islamic debt instruments, and third, our
unique challenges of raising additional capital with
accumulated losses incurred due to set-up costs.
This gives other issuers the courage to go ahead and
issue. The next stage is: how do you take that outside
the banking sector? Because the banking sector has
an advantage as it’s an extension of the sovereign
credit. That doesn’t usually translate to corporates.
So this will remain a challenge.
NewMarketsInvestor: Do you see more innova-
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Q2 2017
tion in terms of products on offer this year?
Ansari, Standard Chartered: This goes back to the
trend of international investors taking a much more
active look at the GCC market, particularly Asian
and US investors. This has resulted in both a sharp
rise in Asian participation on traditional US dollar
issuances, as well as GCC issuers targeting Asian
liquidity directly. The Formosa market out of Taiwan
for example has been particularly active for GCC
borrowers. Last year, QNB successfully tapped the
Formosa market and both NBAD and ADCB have
followed suit this year
NewMarketsInvestor: Let’s look more closely at
sukuk — growth of the market has been slow.
How can development be accelerated?
Kronfol, Franklin: It is a growing market. Islamic
finance remains robust and the source of that demand
is really strong at the retail level. Everywhere
you see Islamic banks operating, they’re capturing
market share, they’re gathering deposits, and so
these treasuries are always looking for paper. If it’s
investment grade, and it’s in that comfortable 10 or
five year tenor, it will be bought.
Al-Thuwaini, Warba: Sukuk issuances significantly
help Islamic banks because when you look at the
new banking regulations, Basel III standards and all
that, where you have stricter liquidity standards to
abide by, conventional banks have a lot more flexibility.
Whenever the bank deposits decrease, conventional
banks can still tap high quality liquid assets
such as bonds to fill that gap. The Islamic banks
have fewer tools at their disposal to meet Basel III
liquidity ratios. All they have, currently, are deposits
and some sukuk and some products that they can replace
with retail deposits. The fact that Saudi Arabia
and others are bringing high quality sukuk to market
gives Islamic banks more flexibility to manage their
liquidity ratios. It will have a greater impact on the
development of Islamic banks, in particular.
Rizk, Arqaam: The proof of the market growing
is that more exotic issuers are considering issuing
sukuk; the likes of Ecuador, for example. The finance
minister came to the region for a non-deal
road-show to sense the appetite of GCC investors for
such an issue. We definitely would.
The problem with sukuk is the lack of structure
standardisation: one Sharia board can approve a
structure as compliant while another can reject the
same. This makes issuing and structuring a sukuk a
lengthier process with higher closing risk and arguably
more expensive. Standardisation of structure
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Q2 2017
would make it easier for issuers to consider sukuks
and therefore have new names issuing.
The regulator needs to step into the sukuk markets
too to encourage market development. Yes, it may
take longer to structure a sukuk. Yes, it may be more
expensive. Yes, it’s harder to keep in contact with
your investors. But, longer term, having diversified
sources of funding and investor bases would help in
difficult times.
Kronfol, Franklin: I don’t think aiming for standardisation
is a necessarily good objective because
it may come at the expense of innovation and new
structures. The market can establish its own standards
and comfort with different structures.
Mirza, Standard Chartered: Three years back, issuers
would bring a five year instrument, and Singapore
would buy some, and Malaysia. Now we see
Hong Kong as a regular stop on deal road-shows,
with HK investors buying actively. Across Europe,
the format has become a mainstay of local investors
and European demand is as strong as for any bond
issuance. Even across select pockets in Asia which
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Q2 2017
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Q2 2017
have traditionally shied away from sukuk, like
Taiwan, onshore investors are taking a closer look
and starting to nudge the regulators to start thinking
about the format more seriously.
The other thing I find interesting is that everyone
who is buying sukuk knows well that the issuance
will likely price 10bp-15bp inside the issuer’s conventional
bond curve, and yet investors seem eager
to take a sukuk over a bond. Maybe it’s a sense that
the sukuk is going to have a wider investor base and
there are more exit options for investors in the secondary
market if needed.
NewMarketsInvestor: Do you feel the same way
Dino, just take a sukuk whenever it comes?
Kronfol, Franklin: Well, yes, but with the same
caveat. The primary source of demand for sukuk is
Islamic banks. And the treasurers of banks are the
same every- where — they want five year fixed,
investment grade, etc. So for the development of the
sukuk market, we need these non-bank investors,
the pension funds, us, insurance companies, to have
that diversity.It’s very important for the development
of the sukuk market. You want it to be authentically
Sharia- compliant, you want it to have more risk
sharing. For these different risk sharing structures to
occur, you need longer term money, private banking
money, asset managers. The banks will make the
sukuk look very much like a bond. And then people
will ask, what’s the point? This thing looks the same,
it’s just an expensive way of doing it. Whereas if
you have more risk sharing, more equity-like characteristics,
that helps the development of the sukuk
market. That will distinguish sukuk and make people
that much more interested in making an allocation,
regardless of where we are in the business cycle.
Rizk, Arqaam: But desperate times call for desperate
measures. Taiwanese and Hong Kong pensioners are
in need of yields, given how tight their markets are.
They need to diversify across regions and GCC is
the most logical choice given the comparable high
credit rating. Standardising sukuk would help the
market by making it easier for investors to understand.
NewMarketsInvestor : What is the pricing dynamic
between sukuk and conventional bonds?
Kronfol, Franklin: Including sukuk in JP Morgan
indices was a big step. Sukuk are, without a doubt,
becoming more mainstream, more widely accepted.
Rizk, Arqaam: Agreed, which also led the gap
between conventional and sukuk spreads to narrow.
Earlier this year, we got instances where bonds and
sukuks traded flat, the likes of Majid Al Futtaim
2024 conventionals and 2025 sukuk, Qatar 2022
conventionals and 2023 sukuk. The conventional
spreads tightened to their similar sukuk levels. This
was driven by Asian demand that was more into conventionals
because of simpler, more straightforward
structures.
NewMarketsInvestor: What other barriers do
you see to the development of the sukuk market?
Mirza, Standard Chartered: One of the things that
needs to be, and will be, addressed soon is the adop
tion of the sukuk format in the US market. I’m confident
that many of the GCC sovereigns would’ve
very happily taken a sukuk for all their jumbo trades
recently if the US was a very active participant in the
format. But with the US being a question mark, it is
understandable that large issuers would side-step
sukuk to ensure that US investors continue to play in
a big way on jumbo deals.
The minute you unlock that, you will have this
massive opening of the sukuk market. That said, the
momentum is shifting and we are seeing global sovereigns
increasingly bring 144A format sukuk with
increasing adoption.
NewMarketsInvestor: How will the forthcoming
Saudi and Oman sukuk impact the market?
Perhaps they will bring in more US investors that
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Q2 2017
bought into the Saudi sovereign issue?
Kronfol, Franklin: It’s an important development. It
will change the make-up of the index for an investment
grade issuer. Definitely Asian demand will be enormous.
For the local market here we’re already at the stage
where sukuk are so widely accepted that it doesn’t really
make a difference in the GCC. It’s an important milestone
for the development of the industry, just like we
were saying it’s good for Kuwait to issue. Now we have
all six GCC sovereigns with issues outstanding. We’ve
never really been there before.
make sure that the external deficits are addressed. But
it does need to be addressed, if you want to remain
credible and continue to access bond markets independently.
*
NewMarketsInvestor: Are the GCC’s currency pegs
here to stay?
Jardaneh, Standard Chartered: Our in-house view is
that the pegs will be maintained over the medium term.
The policy adjustment to the oil price shock has been
through the fiscal channel, which makes sense from an
economics standpoint for the time being. The pegs are
the mainstay of the GCC economies, and play an important
role as nominal anchors. So it would be difficult for
the governments to figure out an alternative. The move
needs to be towards more flexibility at a later stage when
the GCC economies have achieved a higher degree of
diversification. But for that, there needs to be building of
institutional capacity at central banks.
Kronfol, Franklin: And without local markets, how are
you going to set interest rates?
Jardaneh, Standard Chartered: There has to be better
liquidity management, better forecasting of liquidity
needs to be able to set interest rates and deepening of
capital markets to strengthen monetary transmission
channels. You’ll need to be able to set a nominal anchor,
which is something that cannot be done now. But just
doing, let’s say, a re-peg to a new level does not solve a
problem. More exchange rate flexibility would be needed
to enhance the policy toolkit sustainably.
Kronfol, Franklin: Bahrain’s reserve position and their
finances are arguably inconsistent with having a dollar
peg, which will come under pressure at some point. We
suspect that they will find a big deposit by Saudi Arabia
into their central bank or they will figure out a way to
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Q2 2017
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New Markets Investor