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DIB to reopen Gulf bond market next week

sukuk structureDubai Islamic Bank will reopen the Gulf bond market next week with a capital-boosting sukuk, the region’s first debt offering in two months as financial markets there wobbled under the impact of falling oil prices.

A successful offering would not just bolster reserves at DIB, the largest Islamic bank in the United Arab Emirates, but also pave the way for others who may have been waiting to see the fallout from oil prices before coming to the market.

Benchmark Brent oil has plunged by more than half from its June peak, hitting a 5-1/2-year low on Tuesday. The slump gathered pace after a Nov. 27 meeting of OPEC ministers said the group would not cut output to support prices.

Oil and gas production account for nearly half of economic output in the six Gulf Cooperation Council nations, some three-quarters of exports, and an even higher ratio of state revenues, raising fears about the effect on local economies.

Stock markets in Dubai and Saudi Arabia have slipped by 19.4 percent and 11 percent respectively since the OPEC gathering, while debt yields have risen. Dubai’s 3.875 percent January 2023 sukuk widened by 77 basis points between the end of November and mid-December to 4.483 percent.

The volatility brought a halt to what had been active issuance. The last deal from a Gulf issuer came on Nov. 12, when fellow Dubai lender Emirates NBD completed a $500 million five-year trade. Prior to that, there had been 14 deals since Sept. 4.

Against this backdrop, DIB said on Tuesday it had picked eight banks to arrange roadshows between Jan. 8 and 12 in Hong Kong, Singapore, the UAE and London. The potential benchmark size dollar sukuk issue will boost the bank’s Tier 1, or core, capital.

Despite the lack of bond deals and higher potential costs for issuing new debt, the DIB deal should find strong local demand if it is priced well, said Abdul Kadir Hussain, chief executive at Mashreq Capital, the investment unit of Mashreq bank.

“We will need stability in oil prices for spreads to start tightening again. But there is still strong liquidity in the market and the widening in this region has been much more disciplined than in other regions.”

A strong deal could accelerate the plans of other potential issuers who have been waiting on the sidelines, a senior Gulf-based banker on the deal said on condition of anonymity as he is not allowed to speak to the media.

A slew of companies had announced plans last year for bond issues including Bank Muscat, Gulf Finance House and Etisalat.

The transaction is important for DIB, after the bank’s Chief Executive Adnan Chilwan said it would need to bolster its capital reserves to sustain growth.

Strong lending and acquisitions had reduced its total capital adequacy ratio – a key indicator of the bank’s health – to 15.2 percent on Sept. 30. While above the minimum 12 percent set down by the UAE central bank, it was 3 percentage points down from the start of 2014.

HSBC and Standard Chartered are joint structuring banks for the potential issue, with Al Hilal Bank, Emirates NBD, National Bank of Abu Dhabi, Noor Bank, Sharjah Islamic Bank and DIB’s own investment banking team chosen for the deal.-Reuters