Investment firm Kuwait Projects Co.’s (KIPCO) seven-year, $500 million benchmark bond–which featured a fixed 8.875% rate and were priced at a spread of 608 bps above the USD mid-swap curve, fetched orders in excess of $3.3 billion this past week, signaling further maturation of the Gulf’s debt markets. The bond was not only the first to come out of Kuwait this year, but it was also the first international bond of the year to be issued by a Gulf-based private sector firm. KIPCO owns stakes in 50 companies and operates in 21 countries, and this past spring announced that it would “move ahead with plans to sell pension products worth up to $500 million in the Middle East over the next five years, and launch an insurance firm in Algeria [later in the year].”
Earlier this year the IMF stated that debt securities form just 3% of the Middle East and North African (MENA) capital markets–compared with an average of 42% across the rest of global capital markets. However, the credit crisis has ironically spurred the market’s growth, as domestic banks became more risk averse and reticent to enter into the discounted syndicated loans that were viewed as a cheaper alternative to paper, and which had hitherto greased the region’s economic wheels. Borrowers also took to the fact that debt issuances could be targeted to a wider market of buyers–such as pensions and insurance companies–than could syndicated loans, given not only their relative liquidity, but also the fact that they could be denominated in various currencies. Per Dr. Nasser Saidi, Chief Economist of the Dubai International Financial Centre (DIFC), debt markets in fact are the holy grail of the region’s long-term social and economic development:
“Money has been coming in from oil but now we have matured and are looking at economic integration. We have to make that transformation and for that we have to break the link between oil and investments. The price of oil can lead to a cycle of boom and bust and that can be broken by the debt markets.”
The worry, however, centers around the viability of sustained demand. If the “new normal” is indeed accurate, then emerging and frontier debt–both sovereign and corporate–will truly need to replace or at least coincide with more mature, developed issuance.