GCC Fixed Income - There’s No Gulf In Transparency!
GCC Fixed Income
Abu Dhabi, 23 November 2016
A decade ago, lack of transparency was arguably one of the biggest criticisms of the Gulf bond and sukuk market overall. Today, the gap between the transparency offered by issuers versus that expected by international investors has to a large extent been bridged.
Notwithstanding the commendable growth of late, the GCC fixed income markets still remain relatively young. When I started covering this space some ten years ago these markets were positively nascent. Back then, transparency (more specifically, the lack of) was arguably one of the biggest criticisms of GCC borrowers and indeed the Gulf bond and sukuk market overall. We’re now a decade on, and transparency is still a topic of discussion, hence we believe this is a timely opportunity to examine how things have evolved in terms of transparency in the GCC fixed income markets.
In 2006/2007 some of the prominent Government Related Entities (GREs) in the region had just started to use the debt capital markets as a source of funding. We saw several such entities execute inaugural bond and sukuk issues, and with it being the good old days – pre financial crisis – yield hungry investors from around the world soaked up the paper despite being pretty critical about the lack of transparency being provided by some of the issuers. With the benefit of hindsight, we would now argue that criticism could have been made of both sides of the fence. Agreed, many of the issuers could and should have been more transparent about their financials, ownership, business models, risks, etc, but at the same time we would argue that there was a lack of due diligence by some investors who were buying the paper without even making an effort to determine what it was exactly that they were buying. I personally had conversations with investors through which it became evident that they didn’t even know the difference between DP World and Dubai Holding – to them it was all “Doobaayy Inc” and they wanted a piece of the pie, especially with the yields that were on offer.
Better due diligence from investors
Fast forward to the current time and it is clear that there has been a huge amount of progress made, on both sides of the fence. A combination of the global financial crisis, the Dubai debt crisis, and indeed some prominent defaults – and lessons learnt therefrom - such as the Golden Belt (Saad / Al Gosaibi) sukuk, prompted investors to undertake much more detailed due diligence, travel to the GCC, meet the issuers, and ‘kick the tyres’, etc. They’re also being much more selective about their investments by differentiating among the GCC borrowers and cherry-picking the deals that suit them in terms of risk-reward profile. The issuers, through investor feedback/criticism, and indeed natural progression, have been enhancing the level of transparency that they provide, the level of engagement they have with investors, and indeed the access that they offer investors to senior management. This has helped to make the investor base for GCC fixed income larger and more global.
If we take a closer look at the level of transparency now being offered by GCC issuers it is clear there has been a vast improvement! For example, there are many more entities in the Gulf that are rated by the three main credit rating agencies (Moody’s/ S&P/ Fitch) than we had before, disclosure of financial information is much more detailed and regular, many issuers now have Investor Relations personnel, and indeed dedicated IR sections on their websites. Issuers are now making far more effort in terms of international roadshows, engagement with investors on a regular basis, etc. In fact, there are many issuers in the region now that actually pride themselves on the level of transparency that they provide, and indeed there are awards for the transparency and service provided by Investor Relations teams in the Middle East. Quite a transformation.
Of course we must not forget that transparency is a relative concept, and in this regard the GCC issuers still have some opportunities for improvement. We’re going in the right direction, and in many cases we’re getting there. While it is difficult to quantify the degree of transparency being offered, or indeed apply a tangible barometer of some kind, we would argue that the gap that previously existed in terms of the transparency offered by issuers versus that expected by international investors (based on global best practice etc) has to a large extent been bridged. Where we go from here may depend on the approach that individual issuers wish to take.
More information shared
Let’s take Etihad’s latest deal, a 5-year sukuk, as an example. The fact that the company decided that it would only disclose the Offering Circular and associated financial and other details to investors that were willing to sign non-disclosure undertakings (NDU) may have raised a few eyebrows at first - after all, isn’t it just ‘normal’ for an issuer to publish these without such restrictions?
However, maybe there’s another way to look at this. Perhaps this is actually a pretty smart way for privately or Government owned entities to share information that is critical to the investment decision with investors who are willing to show that they are serious about buying the paper (and hence willing to sign the NDU)? Perhaps such an approach is a viable solution for entities that otherwise have a degree of privacy/sensitivity in relation to their financials and other proprietary information? And perhaps this is indeed another degree of sophistication and maturity that GCC issuers are starting to demonstrate when it comes to big topics like transparency and hence shouldn’t we be complimenting it? Some food for thought.
Whichever way we look at it, the previous issues surrounding the lack of transparency in the GCC fixed income markets have to a large extent been mitigated. The vast majority of issuers are providing the information that investors need and want, and some are taking their transparency to another level. Net net, it is safe to say that there’s no longer such a “Gulf” in transparency in these markets!
If you would like to view our latest quarterly review of the GCC fixed income markets, please click here.
Managing Director and Global Head of Market Insights & Strategy
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