Debt market loans on the rise

UAE firms study debt markets as a way to refinance and make acquisitions as they come out of the worst of the global financial crisis.

The need to finance preparations for Qatar's hosting of the 2022 FIFA World Cup is expected to drive bond issuances. Sean Gallup / Getty Images

UAE companies are looking to debt markets to refinance and make acquisitions as they emerge from the worst of the global financial crisis, with businesses such as Etisalat and Taqa leading the way.

Etisalat is arranging the largest debt capital raising since BHP Billiton's abortive bid for PotashCorp in September. The telecoms company is seeking US$19 billion (Dh69.78bn) of loans and bonds to fund takeovers including Zain.

Mergers and acquisitions (M&A) in Europe, the Middle East and Africa have also climbed 34 per cent to reach $890bn so far this year compared with last year, according to data from Bloomberg.

The new interest in debt markets is a turnaround for the region. Nicholas Gilani, co-head of National Bank of Abu Dhabi's investment banking group, said that acquisitions in the region tend to differ from the leveraged buyouts that have characterised M&A in developed markets.

"Typically, the currency of a transaction and an acquisition in this region is cash," he said.

Large deals financed by debt, such as Etisalat's takeover of Zain, would remain a rarity, he said.

However, he still predicted a stronger year for investment banking, driven by government projects.

"The driver of the economy will be public sector rather than private sector. In terms of investment banking, it will be project finance advisory, strategic advisory, followed by private placements, a sprinkling of IPOs and then acquisitions."

Last week a report from Cass Business School said the UAE was the best-positioned country in the Middle East in its outlook for M&A deals.

The possibility of an increase in loans and bonds has sparked excitement at banks. Andrew Dell, the head of debt capital markets at HSBC Middle East, said he expected a bumper year for debt capital markets in the region next year, with expected boosts for loans, bonds and Islamic bonds.

Next year's issuances will be "comfortably in excess" of the $30bn raised so far this year, driven by the need to finance public sector works including preparations for Qatar's hosting of the 2022 FIFA World Cup.

"A critical mass has developed where the Middle East occupies a more important space in global investors' minds than I think it has done," said Mr Dell.

However, John Sfakianakis, the chief economist at Banque Saudi Fransi, said that while debt capital markets would increase modestly, hoping for any more than that would be "wishful thinking".

While debt-fuelled takeovers are common in Europe, he said that such an upsurge in activity in the Middle East was not likely.

"M&A activity in the region is very, very low," said Mr Sfakianakis. "The tendency has been for organic growth rather than acquisitions."

The small size of Gulf markets made it difficult for local companies to expand outside their home markets through takeovers, he said.

"It won't make you big to grow big in the UAE," he added. "Africa is a place where they [regional companies] could see some growth, but very few companies know the continent."