Corporate bonds boom in Kuwait

In its latest economic brief on financial markets in Kuwait, National Bank of Kuwait reviews developments in the corporate bond market during 2001.

The report notes that issuance was quite active relative to previous years, in particular during the second half of 2001. Lower interest rates, regulatory changes and an increased appetite for corporate bonds as investment vehicles contributed to the recent rise in bond issuance.

Though still small in comparison to bank credit and equity markets, the bond market appears poised to grow in importance as a source of long-term financing for Kuwaiti corporations. Still, its development will remain constrained by the lack of a secondary market that would enable investors to liquidate their holding if in need for liquidity.

Between 1968 and 1987, Kuwait enjoyed a relatively active local bond market. This market was dominated by foreign institutional issuers including international organizations, foreign municipalities and sovereign issuers. Bond issues by foreign institutions was most active in 1978 and 1979.

In the 1980's activity gradually declined with the last two issues taking place in 1987, which included a KD 30 million bond issue for the World Bank. In that same year, the CBK issued KD 120 million in 3-month treasury bills, the very first auction of treasury debt securities. It was the beginning of a new era in the Kuwaiti bond market.

The first local corporate bond issue in Kuwait was in 1975 when the Industrial Bank of Kuwait offered KD 5 million in debt. Another 11 local corporations issued bonds worth KD 98 million before the Iraqi invasion. Activity was the highest between 1982 and 1986 with a total of KD 53 million in corporate bonds issued during that period by 7 issuers. The still-nascent corporate bond market was brought to an abrupt end by the Iraqi invasion.

Though the corporate bond market was not revived immediately following liberation in 1991, activity since 1993 has exceeded pre-invasion levels with KD 352 million in corporate bonds issued between 1993 and 2001. This is more than three times what was issued during the 1970's and 1980's. Since 1997, a growing number of Kuwaiti corporations have been issuing bonds with investors keen on participating in such issues.

In 2001, four corporations issued KD 120 million in bonds, making it by far the most active year for corporate bond issues in Kuwait ever. One of the bonds was issued late in 1H01 with the rest offered during 2H01. At the start of 2001 there were KD 185 million in outstanding corporate bonds. By the end of the year this number had risen by 16% to KD 215 million. Though 2000 saw no bond issues, the three prior years were quite active, with KD 75 million in bonds issued in each of 1998 and 1999, and KD 35 million issued in 1997.

Two of the bonds issued in 2001 helped rollover maturing or retired debt. National Industries Group issued a 5-year KD 35 million bond in November to replace its 3-year maturing bond. Kuwait Projects Company (KIPCO) also issued a bond in November and opted to retire one of its two outstanding bonds in December.
Corporate bonds in Kuwait tend to be medium-term with tenors ranging from 3 to 5 years.

All four bonds issued in 2001 have a 5-year tenor. While the bonds have tended to carry a fixed annual or semi-annual coupon, the issue by KIPCO in 2001 had a variable annual coupon payment priced 125 basis points above the CBK discount rate.

The NBK report indicates that a series of interest rate cuts by the central bank during 2001 was an important factor behind the surge in bond issuance during the year. The CBK reduced the discount rate from 7.25% at the start of the year to 4.25% following the most recent cut in October, a 300 basis point drop. This made it more attractive for issuers and increased the appetite for investors looking for a low-risk fixed-income investment paying more than bank deposits.

New CBK regulation in 2000 has made it more attractive for bank issuers to finance their assets through corporate bonds. The change allows banks to increase their consumer lending capacity by 30% of the value of corporate bonds. In contrast, banks can extend consumer loans only up to 12% of the value of their customer deposits.

For banks seeking to grow their consumer loans portfolio, issuing corporate bonds is attractive.
NBK's report notes that the large payments received from the UNCC during the year has also helped boost the demand for new corporate bond issues.

The increased liquidity from UNCC payments created higher demand particularly among institutional investors facing limited alternatives for low-risk investments in a low rate environment. New corporate issues were paying between 112 and 250 basis points above the 1-year treasury bonds.

There are a number of bond issues in the pipeline at present, which could see the light sometime in 2002. Commercial Facilities Company is working on a KD 18 million bond offering and the privately held Financing Services Company recently announced intentions to issue a KD 15 million bond.

On February 19, National Bank of Kuwait offered a variable rate 3-year Eurobond raising $450 million. This is the first bond issue by a Kuwaiti corporation in the international market. The security has been listed on the Luxembourg exchange and carries a variable rate tied to the three month London Interbank Offer Rate (LIBOR).

A secondary corporate bond market is virtually non-existent in Kuwait. Despite a number of debt issues being formally listed on the KSE, secondary trading is rare. Most investors buy the bonds at the time of issue and hold them to maturity. Investors are largely made up of Kuwaiti corporations and high-net-worth individuals who see these securities as a rare opportunity to diversify their portfolio and secure a higher return than bank deposits with relatively low risk.

One of the factors hampering the development of a secondary market aside from the rarity of bond issues, is the absence of a formal secondary market for risk-free government bonds against which the market can benchmark corporate bond yield.