Look beyond the US dollar

The US dollar (USD) is the main source of funding for issuers in the Gulf Co-operation Council (GCC). According to Dealogic, more than 90 percent of issuance so far this year has been in the dollar.

There are good reasons why it holds the greatest appeal. The market is big, liquid and provides access to the largest emerging market investor base. Moreover, many emerging market currencies are linked to the USD, making it a natural source of funding, especially for those issuers looking to establish themselves initially in the capital markets.

Being dollar-dependent holds dangers, however. An over-reliance on one source of funding can be restrictive for issuers and in some cases may result in them paying more than necessary.

Moving into different currencies and markets allows issuers to broaden their sources of financing by tapping new investors. This provides the opportunity to create pricing tension and competition for their credit across different markets, eventually driving down the overall funding costs.

It is necessary to take a longer-term view when seeking to access new markets. While some markets offer a pricing arbitrage immediately, issuers may find themselves paying a fuller price initially. However, the pricing premium starts to disappear once they become more widely known in that market.

For example, IPIC started tapping the non- dollar markets in 2011 when it went into the euro markets to finance an acquisition. The company returned in 2012 with a further euro issuance, which it was able to price at substantially improved levels as investors had become more familiar and comfortable with the credit story.

Similar to IPIC, a number of GCC financials have ventured into non-dollar markets, paying less because funding sources are more fragmented and they are able to take advantage of competition and arbitrage.

There is one other, smaller reason why issuers may choose an alternative market to USD. The US dollar market prefers having the benchmark sized deals (i.e. USD500 million or larger). This is because the market participants perceive such a minimum size as necessary to allow for sufficient liquidity in the secondary market. Issuers are faced with a choice: raise more than they need and suffer the costs of carry, or look elsewhere.

Asian currencies, such as the Malaysian ringgit, Hong Kong dollar, the Singapore dollar and the Swiss franc have been particularly popular with issuers as they allow smaller sizes to be launched and provide pricing arbitrage opportunities. In addition, these markets have plenty of liquidity and issues have been oversubscribed.

Finally, there are some concerns over when and how the US Federal Reserve might bring to an end and unwind its Quantitative Easing programme, which helped to underpin the US debt market. The fear that the demand for USD-denominated bonds might subsequently ease is another reason for issuers to explore funding diversification.

There are some drawbacks for accessing non-USD markets. In some instances, there is much more bureaucracy and legal work, which can take time and money.

Issuers will also have to invest in additional marketing to make themselves known to new investors and to make a mark. However, these costs will pay off as the issuer becomes better known, its documentation is established and its cost of funding improves.

Many investors across all markets are keen on investing in GCC issuers because they can offer a decent yield for the risk. Despite the underlying economic strength of the region, reflected by the region’s strong ratings, the inherent political uncertainty implies they offer good returns.

Once issuers are established in the US dollar market, where it is easier to build a presence, it would be prudent for them to explore different avenues to secure funding. A move into the non-USD market can provide access to new investors. It shows an issuer is not dependent on any particular investor base, creating competition for its credit. Finally, diversifying can allow issuers to capitalise on pricing arbitrage across markets.

The advantages outweigh the disadvantages. Exploring alternative markets could benefit all GCC issuers. 

The absolute level of non-US dollar issuance from GCC countries has risen sharply since 2009. US dollar financing spiked in 2012 because of a surge in demand for sukuk debt from investors.


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