Bank bonds to be guaranteed

The Federal National Council today passed a new law guaranteeing bonds issued by local banks.

A law guaranteeing bonds issued by local banks was passed by the Federal National Council Tuesday in a move aimed at making fundraising easier for the nation's lenders. The law, which now awaits final approval from Sheikh Khalifa, the President of the UAE, is the third guarantee measure the Government has passed to ensure the stability of the country's banking system during the financial crisis. It follows earlier government initiatives aimed at backing local deposits and interbank loans. If signed into law, the bond guarantee would cover bonds issued before Oct 11, 2011, and would last for five years. "This kind of a federal guarantee sends a strong signal of confidence to the market," said Victor Lohle, the senior credit analyst at Standard Chartered. "On the surface it does look attractive and it shows a real commitment by the Government." Under the plan, the Ministry of Finance would evaluate whether to give government backing to bank-issued bonds on a case-by-case basis. Only newly issued medium-term notes and longer-dated bonds would be eligible, contrary to earlier reports that the law would also cover syndicated bank loans. "For each bank we will review the value of these notes they need to issue. Then we will determine the guarantee," said Obaid Humaid al Tayer, the Minister of State for Financial Affairs. The new law also allows the ministry to make decisions without giving detailed reasons for its actions. Local banks have faced growing difficulties in raising money through international bond markets since the global financial crisis hit. The value of new bonds and syndicated loans from UAE banks has fallen from more than US$10 billion (Dh36.73bn) in 2007 to under $800 million this year, according to a report from Standard Chartered. With the Government's backing, it is expected that banks will find raising money through bond issues easier and cheaper. A guarantee may also help banks refinance old debt that is maturing soon. Almost $3bn of bonds issued by banks and bank loans mature this year, while about $7bn come to maturity next year. The guarantee also aims to help start a thriving bond market in the UAE, an initiative that has recently become a priority for the Government. In April, Abu Dhabi issued $3bn in five-year and 10-year government bonds as part of a $10bn programme. Last month, the FNC passed legislation regulating the issuance of government bonds, which was seen as a key step towards establishing a local bond market. During the financial crisis, investors across the globe have grown reluctant to buy bank debt, including bonds. Without a steady stream of cash from bond sales, banks have found themselves with less money to lend. That has meant less financing for everything from major construction projects to consumer loans. "We feel that UAE banks must have additional liquidity," said Mohieddine Kronfol, the managing director at Algebra Capital in Dubai. "If they get that independently, that is good. If they need additional support, then that should be supplied." But there may be downsides. According to one analyst, who declined to be named, banks may not seek to have their bonds guaranteed because of the negative message it might send to potential investors. "Banks may be reluctant to send this kind of a signal to investors, that they need to rely on the government," the analyst said. [e-mail] uharnischfeger.ae