GCC Credit Thoughts – November 16, 2009

The new issue pipeline is jammed as the window of opportunity for 2009 comes to an end, as we enter the Global Holiday season. GE Capital and First Gulf Bank will be tapping the global Dollar Debt Markets with what are believed to be benchmark size issues – GE Capital with a sukuk and FGB with a conventional bond offering. Citi and Goldman are the leads on the GE Capital sukuk and BNP, Citi, DB and HSBC are the arrangers for the FGB issue. This will be followed by a recently announced first tranche of an intended $5 billion program by the Government of Qatar – we should likely see some further details on this towards the end of the week.

GE Capital – Participants in the regional sukuk markets will agree that the one of the greatest challenges we face is the lack of depth in the secondary markets – paper just doesn't seem to be as liquid as other parts of the world. Our markets are in the early stages of their development and will continue to grow as we see new issues, in a variety of currencies, with a diversified range of maturities. It's fantastic, in my opinion, to see the likes of a global player like GE look to tap the local markets by issuing their first sukuk. There is obviously a growing demand for sukuk product, and has been a marked lack of supply in the primary markets this past year. GE is a very sophisticated player in the Debt space, the largest issuer of corporate debt in the world, and has a plethora of debt outstanding, with wide ranges of structures, in a variety of currencies. It was only a matter of time before they decided to explore Middle Eastern appetite by issuing a Shariah compliant product. The proposed sukuk will have an Ijara structure and will be backed by operating lease receivables from GE's aircraft leasing business, which has nearly 1500 aircrafts, leased to leading global airlines, with average lease terms of 7 years. The sukuk will have asset coverage between 125% - 140% and will also have a cash reserve of 10%. GE capital just completed a global non deal roadshow, prior to announcing this issue, and there are no additional marketing trips planned.

Where does this price? If we assume that it will be a 5 year sukuk, and look at recent 5 years issued by GE Capital, we can see that they have priced around the +150 bps level. I believe that this one will be no different – I estimate a base case scenario of +150 and then add on a small sukuk premium to make it attractive to the local markets – maybe an additional 15-20 bps, so at the end of the day, I believe this will come in around +165 - +170 bps. GE Capital is rated AA2 / AA+, and this sukuk will be rated at similar levels. If we estimate pricing around +165, we get to just above the 4% level, which would mean that the GE Capital sukuk would be come out at a 30 bps discount to the Mubadala 5 years, which are rated AA2, AA. It would be a slight premium to the TDIC Sukuk, rated AA2 and AA, which currently offers 4.32%. Compared to Qatari paper, it would be priced in line with the QTEL 5 years, which are rated A1 and A-, lower than GE Capital.

So, bottom line – I think it's great to see a global player enter the sukuk markets because I believe it helps broaden the offering available to sukuk investors. If it prices at the +160 - +165 levels, I think it is well priced compared to regional peers offering a similar risk profile, but allows regional investors to diversify their portfolio to geographic areas outside the Middle East. Because of the lack of new sukuk issues and the pent up demand on the buy side for this product, coupled with a solid credit profile of the issuer, I expect this issue to perform well, not only on the primary, but also in the secondary markets. One concern I have, however, is deal size. If the size of the offering is small, liquidity will obviously be an issue. Let's see how things shapes up over the coming days.

First Gulf Bank – Another UAE bank is ready to tap the debt markets with a new issue this week. FGB's ownership structure is very impressive, with the Abu Dhabi Royal Family owning around 65% of the company, in their private capacity. Rather than going through the fundamentals of the company, I am going to highlight some points that were made during their roadshow presentation in Dubai yesterday.

• 18% exposure to Dubai, 64% exposure to the Abu Dhabi private sector
• NPL's -
  
  • 2006 – 1.4%
  • 2007 – 1.0%
  • 2008 – 0.6%
  • March 2009 – 0.70%
  • June 2009 – 1.10%
  • September 2009 – 1.40%
  • They are noticing decreasing trends in retail NPL's with corporate NPL's expected to peak in 2010
• Provisioning Coverage
  
  • 2006 – 130%
  • 2007 – 144%
  • 2008 – 233%
  • March 2009 – 235%
  • June 2009 – 165%
  • September 2009 – 153%
  • FGB plans to keep provisioning at the 150% level for the remainder of 2009 and expect it to dip below 100% in 2010
• Net interest margin is currently at 3.6% and they plan on maintaining this level till the end of 2009 – they believe 3%+ is easily doable in 2010
• Cost / Income ratio is the lowest in the UAE at 18.5%
  
  • They have always maintained this at the sub 25% level, and expect to keep it between 20 – 23% in the coming years

No details were given with regards to size and pricing, and the company is finishing up its marketing in Europe by Tuesday, and expected to wrap things up by mid week. Ratings are currently A+ and A2 and management said that they have recently met with Fitch and although they do not expect any upgrades due to risk associated with regional banks, there is no imminent risk of a downgrade.

The government of the UAE has shown a significant amount of support to the local banking sector by directly injecting capital where needed, providing Federal guarantees on deposits, and looking to guarantee all debt issued by the UAE banks. That coupled with the fact that the Abu Dhabi royals have such a significant stake in FGB leads me to believe that this is a bank that should be around for a while, and should have no problem servicing its debt load.

Similar to the CBQ issue – I think it's a good credit, and suitable for those who are looking for a long term investment. I'm a sound believer in the old adage – The Trend is Your Friend. And looking back at the performance of recent bank issues in the region (NBAD, ADCB, CBQ), I won't be going out on a limb when I say that I don't think that this issue will be for those looking for a quick turnaround.