Name is BOND

What if somebody tells you that you can earn around 5% on US dollars? (It takes a while for a business to generate that kind of return on investment in these times on a continuous basis in dollar terms.) And what if I tell you that it’s secure product in terms of ratings and has kind of sovereign counter guarantee. Sounds awesome, isn’t it? I am talking about the dollar bonds issued in the GCC (Gulf Corporation Countries) 

 Let us talk about the region

A             The middle-east and more specifically GCC countries are oil reliant and it is their main source of income. Albeit, UAE, Oman and Saudi have reasonably diversified, there exist some threads even in these industries that rely on the buoyancy of oil market. The oil prices have been sagging for the last year and half and as per experts it’s expected to remain this way. As major oil players like Saudi, try and consolidate its market share without participating in supply reduction, any effort by the OPEC cartel to manage prices will not reach a logical conclusion. Plus, there is Iran's oil expected to create a glut in the market. Does not sound great for oil prices and let us assume this is true for time being.            

Most of these countries in GCC, budget oil, into their plans at lower prices and expend based on that. Do remember that many of these were budget surplus countries till now. They may see small deficits to begin with, but then they have huge sovereign reserve, which were built through high oil revenues across years, as a buffer to any potential deficits. This is precisely the rationale why the ratings of these countries have not changed.

B             The GCC countries have a rough neighborhood. There are proxy wars going on in Iraq, Syria, Yemen, Israel and Lebanon. This does add to the political risk; however a significant erosion of political climate or warlike-scenario with in these countries seems remote in near future.  Despite, being slightly alienated by Obama’s foreign policy, they still enjoy the broader cover of the US and its allies. This can be ratified by US's continuing military presence in these countries. 

Which issuers to target in GCC

There are a lot of issuers coming up lately. Most of them are semi-sovereign infrastructure and utility companies that want to raise money as the capital markets have substantially dried up. The funds they used to get from Governments have also reduced due to rationing of capital. Most of the governments are coming with treasury bills, mainly to boost the inter bank liquidity and to finance its deficits. They are generally more secure, being sovereign, but the rates offered are not very attractive. Plus, most of them have tenure of around one year or less.

But what I would actually like to focus is on the bonds issued by banks in these countries. And it’s expected that these banks will come with lot of these bonds in near future.

The local banks enjoy kind of cover from their central banks and in effect from their governments. And these governments are cash rich and can pump money in case of any eventuality. And there is no history of any bank going bust among the GCC countries. Most of these banks enjoy investment grade ratings.  So they are as safe as they can be.

Let me introduce Basel III

This is also the right time to introduce Basel. Basel III is a set of reform measures designed to improve the regulation, supervision and risk management within the banking sector. Banks have until the end of 2018 to comply with the new capital requirements. Based on BASEL III induced capital adequacy requirement to reinforce its capital base, many banks plan to issue bonds, as capital from the owners will not be very forthcoming.

Combinations and permutations

These banks will issue bonds in local currency or Dollar terms. It can be in the form of conventional bonds or Sokouk (Islamic bonds), based on the philosophy they adhere with. The tenors are expected to range from 5 to 10 years. The sweet spot for me would be a dollar based issue for a period of 5 years with high interest rate for a banking institution in GCC. Ideally, it should be listed in some foreign exchange, so I can exit as needed. According to some estimates, the GCC banks will issue $17 billion of Additional Tier 1 bonds and $26 billion of Tier 2 bonds in order to optimize their balance sheets and improve capital positions.

If you feel that a part of your portfolio is good at around 5%  in dollar returns, then this is the time to take a plunge, as there will be a lot on the platter. This is the time to begin your research on this quest. Unlike, inviting the risk of doing a business or managing a real estate or constantly monitoring the stock markets, this is the return you can get without venturing out of your house. 

It’s raining bonds….

To give an sample idea, I have assimilated some of the issues done in GCC in this year