Corporate bonds set to boost UAE capital markets

Two corporate bond issues are underway in the UAE that will capitalise on the success of Emirates Airline's $408 million bond launched in July.

Local banking sources have told Gulf News that a $100-$150 million bond will be presented by the end of December or early next year. However, a much larger issue is also on hold, awaiting the outcome of the current international emergency.

This will be good news for the UAE capital market whose stock exchanges have struggled to make headway since their launch two years ago. Bond issues will be attractive to investors concerned about the fact that share prices have tended to fall, although bonds are tradable instruments and therefore not immune from market forces either.

However, with interest rates so low, it is hardly surprising that major UAE corporations find a bond offering attractive. This means that they can lock in a section of their debt at a very attractive rate of interest over a long period.

The problem for investors is that if interest rates begin to move upwards, as you would expect when the United States economy begins to recover, then bonds issued with a low coupon will fall in value. Thus the investment value of such an instrument is questionable, unless you believe that interest rates will fall further in the short and medium term, then they are a good buy.

The fear must surely be that, just as with shares, by the time that most investors wake up to the opportunity to invest, it has already past. From that standpoint investors might be better advised to put their money in depressed UAE stocks, and wait for a market upturn. Incidentally, the dividends paid by UAE blue chips are rather like having a coupon payment anyhow, and the capital gain, or loss, will be on top of that.

But there is no doubt that the National Bank of Abu Dhabi will cause a stir with the next crop of bond issues, as it is sometime since local investors have been presented with hardly anything new. Aside from the Emirates Airline bond, you have to look back to 1999 and the BMW US Capital Corporation's $100 million bond and the $109m Abbey National issue.

All three issues were successful and no doubt there will be buyers for the next corporate bond offering. Could this be the spark that ignites the UAE stock market into a new bull phase? Well, that was the hope in 1999, but it has to happen sometime.