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GCC Credit Weekly

Published Date: 06 August 2018

 

Escalating trade war fears kept risk appetite at bay last week, causing benchmark UST yield curves to shift downwards with 2yr, 5yr and 10yr UST yields closing the week at 2.64% (-2bps w/w/), 2.81% (-4bps w/w) and 2.95% (-2bps w/w) respectively. Across the Atlantic, yield on 10yr Gilts also were subdued at 1.33% (-1bp w/w) despite Bank of England raising rates by 25bps to 0.75% last week. Credit spreads had a week of range bound trading as corporate earnings continued to surprise on the upside. CDS level on US IG index was unchanged at 59bps while that on Euro Main closed the week wider only by a bp to 64bps.

Credit protection costs in the GCC region were also mostly range bound with marginal tightening of CDS levels on Abu Dhabi at 63bps, Dubai at 125bps, Qatar at 81bps and Saudi Arabia at 81bps respectively. However, Bahrain CDS widened by 5bps to 356bps on the back of its rating getting downgraded by one notch to B2 by Moody’s. In the cash bond space, yield on Barclays GCC bond index rose 2bps to 4.45% as credit spreads increased 5bps to 168 bps during the week, driven mainly by the rising yield on the Bahraini curve.

Moody’s cut Bahrain’s sovereign rating by one notch to B2, from B1, citing external and government liquidity risks, difficulty in market access, high borrowing requirements, and low reserves. Although investor support for Bahrain bonds was re-cemented in July after GCC neighbors announced intention to support Bahrain, the confidence is now under stress again owing to lack of details on the deal, if any. Yield on BHRAIN 20s increased 35bps during the week to 6.06% and that on BHRAIN 47s increased by 9bps to 8.64%.

Abu Dhabi Islamic Bank’s $1bn Tier1 sukuk is likely to be called on its upcoming call date in October 2018 after its board approved the proposal to raise about $1 billion from a rights issue and $750 million via perpetual Tier 1 sukuk. Yield on ADIBUH perp narrowed 12bps to close the week at 4.96% although still remains higher than 3.62% where it was at the beginning of this year.

Beside small private placements of less than $50 million each by several local banks, recent activity in the GCC primary market has been negligible. That said, looking ahead, the potential pipeline looks healthy. Saudi Aramco, which is considering buying 70% of SABIC (worth circa $70 billion) from Saudi’s PIF, is weighing options to tap the international bond market for possibly the largest corporate bond deal by any emerging market issuer.

GCC vs EM IG bonds and US IG bonds - OAS history (%)

Source: Bloomberg, Emirates NBD Research

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