HSBC Holdings, the top arranger of debt issues in the Middle East so far this year, said it expects a flurry of bond offerings in the second half, including from prime sovereign-linked Abu Dhabi names yet to tap the market in 2012

Debt issuance from the Gulf region has held up well so far this year, as a turn to Islamic bonds - with their specific liquidity pool - and strong local liquidity helped confound volatile markets which stymied other emerging market borrowers.

During May, the only two dollar-denominated bonds issued in emerging Europe and  MEA, were both from Middle East, while total bond issuance from the region in the first half year was up 51 per cent on the same period last year at $16.9 billion, according to Thomson Reuters data.

HSBC expects to arrange more debt issues in the remainder of the year, as issuers look to international bond markets to meet their capital needs, according to a top executive.

'Can we see a dozen (deals in our pipeline) materialise in next six months? Yes, it's likely,' Georges Elhedery, head of global markets, Mena, at the UK-based lender told Reuters in an interview.

'If you look at places like Abu Dhabi, in the GRE (government-related entity) space, we haven't seen much issuance this year. We would expect in the second half of the year some of those entities will tap the market,' he added.

Abu Dhabi state-linked entities such as International Petroleum Investment Company (IPIC) - which issued a three-tranche $3.75 billion bond last October - and sovereign fund Mubadala are frequent issuers in the global debt markets but have stayed away so far this year.

HSBC topped the Middle Eastern debt capital markets league table for the first half, arranging $2.23 billion of bonds and sukuk, according to Thomson Reuters data. The lender was followed in the rankings by Standard Chartered and Deutsche Bank.

Regional liquidity

One trait of Gulf bond issuance in recent months has been the high allocation to regional investors, both as a result of high liquidity in local markets and the general reluctance of international investors to deploy capital in uncertain times.

For instance, a $650 million sukuk from Dubai's state-owned Jebel Ali Free Zone last month was 65 per cent placed within the Mena region and 64 per cent of the total with banks.

Given the underdeveloped pension and insurance sectors in the Gulf, banks are by far the largest buyers of bond and sukuk debt, meaning local demand is reliant on lenders stepping up.

'If you look at the UAE alone, bank deposits have increased by around Dh80 billion ($21.8 billion) this year, while lending has mildly decreased. So banks are sitting on much bigger cash piles,' Elhedery said.

Impending guidelines on debt exposures at UAE banks - under which lending to UAE governments and their non-commercial entities will be capped at 100 per cent of a bank's capital base and at 25 per cent for lending to individual borrowers - are a factor which could influence the thinking of banks in the emirates towards buying bonds.

Should there be a deleveraging of their bond portfolios by UAE banks currently over the limit - a category which includes Emirates NBD, National Bank of Abu Dhabi and Abu Dhabi Commercial Bank, according to a Deutsche Bank note from April - Elhedery said HSBC could be a buyer.

'We do have a trading team on the ground to trade the secondary market and they are always looking at interesting opportunities. So if there are bonds being offloaded as part of some new regulations, we will look at it as part of our normal course of business,' Elhedery said.

International investors remain interested in some top quality regional names, especially Saudi Arabian issuers, Elhedery said.

Offerings from Saudi borrowers are rare but, as exemplified by Saudi Electricity Company in March - when it attracted $17.7 billion of demand for its $1.75 billion sukuk - they are highly sought after.

'We would like to see the international market in Saudi grow because investor appetite globally for Saudi assets is very strong,' said Elhedery.-Reuters