Debt issuance in the Middle East rose to $ 24.3 billion in the first six months compared with $ 12.6 billion in the same period last year, latest figures from the data provider Dealogic revealed. About half of the region’s issuance was in Islamic bonds, as the number of Shariah-compliant deals more than tripled compared with last year.

The majority of Islamic bonds sold in the Middle East this year came from Saudi Arabia, according to the Dealogic figures. The Saudi Arabia General Authority Of Civil Aviation, or GACA, raised a SR15 billion ($ 4 billion) Islamic bond, or sukuk, at the start of this year to fund an airport expansion project. Saudi Electricity Co., the biggest utility company in the Kingdom, earlier this year issued a two-tranche, $ 1.75 billion sukuk.


"Regional companies have continued to issue with some for refinancing purposes, but some for genuine growth," said Georges Elhedery, head of global markets for the Middle East and North Africa at HSBC, which led the Dealogic bookrunner rankings in the first half of the year for conventional and Islamic debt sales.

"Second, many issuers are taking advantage of windows of issuance, and choosing to push the button now rather than later. Certainly it’s our view that this is a good time to lock down financing," Elhedery said. The uptick in borrowing coincided with the latest data showing that Middle East borrowers have shrugged off the crisis in the eurozone, nearly doubling their debt issuance in the first half of 2012 amid a surge in Islamic bonds from Saudi Arabia and as Dubai continued to refinance some of its indebted state companies.

Middle East markets have been reassured by higher revenues and the improved credit profile of many regional borrowers following the surge in oil prices in 2011 and early 2012. Issuers have also benefited from relatively good liquidity in Islamic bond markets this year.

"The macroeconomic environment in the Middle East and North Africa region is still robust especially given where oil prices are, and hence the credit fundamentals on the supply side for those issuers have not deteriorated vis-à-vis their counterparts in the (developed) markets," said Ashok Aram, chief executive for Deutsche Bank AG in the Middle East and North Africa. "If anything they have benefited from some form of flight to quality," he said.

In Dubai, a number of government-related entities took advantage of good liquidity in the Islamic finance markets to raise new loans to repay maturing borrowings. Jebel Ali Free Zone raised a $ 650 million sukuk to help meet a November maturity on its original Islamic bond. DIFC Investments, an investment arm of the Dubai International Financial Centre, also raised a loan to refinance debt in the first half of 2012, while Dubai Holding Commercial Operations Group, an arm of Dubai Holding, used its cash resources to repay a maturing loan.

Average sukuk yields have come down since the beginning of the year as pricing has tightened, HSBC-Nasdaq Dubai’s Gulf sukuk index shows, a reflection of strong demand and ample liquidity in the market.

"Issuers are attracted to sukuk by the pricing advantage that can often be obtained, and many regional issuers can only issue in an Islamic format anyway. There remains a deep pool of liquidity in the Islamic space, both from Islamic institutions who can only invest in sukuk to those conventional investors who are attracted by the yields on offer," said Richard O’Callaghan, capital markets & Islamic finance partner at the law firm Linklaters in Dubai.

Meanwhile, the total value of Middle East merger and acquisition transactions rose to the highest point since the onset of the global economic crisis in the first half of 2012, continuing a steady but modest recovery. At the same time, the number of M&A transactions rose sharply in the first half, suggesting banks are conducting more but smaller deals in the region, Dealogic said.

However, despite the recovery in debt issuance and M&A transactions, activity in Middle East equity capital markets remained weak in the first half with volumes well below pre-crisis levels.

Middle East investment banking revenues continue to decline, falling to their lowest point since 2005, before the major investment banks were flocking to the region to expand in new financial hubs such as Dubai, according to Dealogic data.

Some bankers argue that the major debt deals aren’t very lucrative but serve for relationship-building or as a springboard to other business deals. Senior executives at some international banks have said that the bulk of their revenue now stems from products such as equity derivatives, figures that aren’t taken into account in the league tables, rather than traditional income sources such as lending and M&A.

"Investment banks are looking very closely at their business models which will result in a rationalization of some of their product offerings," said Aram at Deutsche Bank. "Clients’ requirements will be resourced by fewer dedicated desks whilst still providing a full service offering." –