Tuesday 3, November 2015

Dubai – MENA Herald: Initial Public offering

The revival of investor sentiment and interest in Initial Public Offerings (“IPOs”) in the Gulf Cooperation Council (“GCC”) countries experienced in 2014, slowed down in the first quarter (“Q1”) of 2015, slightly picking up pace in Q2 and further slowing down in Q3 of the year. Regional IPO activity in Q3 is usually slower due to summer holidays, the Holy month of Ramadan and Eid. This seasonal trend was perhaps exaggerated in Q3 as markets absorbed the impact of continued lower oil prices, growing geopolitical concerns and wider economic uncertainty, thus potentially impacting new issuers coming to market, according to PwC’s Capital Markets and Accounting Advisory Services team.

Period to period performance

Although the trend in recent years has been lower activity during Q3, we have seen at least one listing in the GCC in that quarter. However, this year there were no IPOs in Q3. Looking at IPO activity in the same quarter in the prior year, there were two offerings raising a total of USD 1.6 billion, largely driven by the USD 1.5 billion IPO of Emaar Malls Group, and another four IPOs raising a total of USD 1.1 billion in Q2 2015.

Steven Drake, Head of PwC’s Capital Markets and Accounting Advisory Services team in the Middle East, said:

“The past months have proven to be challenging for companies wanting to come to market. With the continued volatility in oil prices, regional geopolitics such as Yemen and Syria, together with the slowing of the Chinese economy amongst other factors that transpired this quarter have weighed heavily on the equity markets and IPO issuances alike. Reflecting the weak market sentiment issuers have put any plans of listing on hold until market conditions improve and the right time to IPO emerges.

We are now into the final quarter and we expect minimal or no activity amongst GCC corporates.”

Global IPOs

The IPO market in the GCC, to some extent, mirrors the global picture in terms of the trend in IPO activity demonstrating once again that the GCC economies cannot decouple from European or other main markets.  The global IPO market cooled during Q1 2015, improved in Q2 2015 and slowed in Q3 2015, partly reflecting the summer lull and, more importantly, suffering from increased volatility due to China-related concerns and the fear of a US Federal Reserve rate hike. Global IPO money raised stood at USD 20.3 billion via 164 deals in Q3 2015, compared to USD 69.5 billion via 247 deals in Q3 2014 and USD 28.4 billion via 181 deals in Q3 2013.

The Americas were the leading region in terms of IPO activity in Q3 2015, accounting for 29% (48) of the total number of deals and 45% (USD 9.2 billion) of money raised globally. However, Asia-Pacific remains the leading region 2015YTD, with 55% (459) of the number of global IPOs in the first nine months of the year and 37% (USD 49.2 billion) of money raised. The IPO frenzy in China, caused by market reforms and favourable monetary policy, was one of the key drivers behind Asia-Pacific’s success during the first half of the year. However, the Chinese government suspended IPO activity in (Mainland) China as of early July, collapsing regional and international capital markets.

Bond and Sukuk Markets

Low oil prices amongst other factors have taken their toll on the debt market in Q3 2015 and more so on corporate issuance in the GCC as liquidity tightens and investors are being more cautious on how they invest their money. This quarter we saw more activity from sovereign issuers as governments went to market to issue debt to make up for budget deficits resulting from falling oil prices.

Bond Issuances

Despite the subdued corporate deals in the region in Q3, Etihad Airways and its partner airlines raised a total of USD 700 million. The initial issuance of USD 500 million was re-opened for investors following strong demand received. The bond was priced at 6.875%, tighter than the initial price of 7%. Also in corporate bonds, Renaissance Services SAOG issued a two tranche (USD and Omani Riyals) perpetual bond in the amount of USD 87.0 million and USD 38.5 million both with a coupon of 7.9%. The bond was well received by Omani investors and marked the first international bond by a Muscat Securities Market listed Omani company.

On the sovereign front, the regional government were active players this quarter. The Government of Saudi Arabia was one of the issuers with a total of three issuances in the amount of USD 5.3 billion (SAR 20.0 billion), USD 5.3 billion (SAR 20.0 billion) and USD 4.0 billion (SAR 15.0 billion). The Central Bank of Qatar was another contributor to the sovereign bonds market with a total of four issuances in the amount of USD 1.1 billion (QAR 4.2 billion), USD 1.1 billion (QAR 4.2 billion), USD 398.0 million (QAR 1.5 billion) and USD 234.0 million (QAR 850.0 million).

Sukuk Issuances

In the sukuk market, Saudi Arabia was a key player with notable issuances such as the USD 426.6 million (SAR 1.6 billion) sukuk with a floating interest rate by Almarai Company in September. The issue was offered to private investors in Saudi Arabia. The National Shipping Company of Saudi Arabia, issued a USD 1.04 billion (SAR 3.9 billion) sukuk with a coupon of 1.645%.

The Central Bank of Qatar also tapped the sukuk market this quarter with a total of four issuances two in the amount of USD 467 million (QAR 1.7 billion) and the other two in the amount of USD 206 million (QAR 750 million).

Steven Drake, Head of PwC’s Capital Markets and Accounting Advisory Services team in the Middle East region, also said:

“The debt market in the region was relatively muted this quarter despite the resilience witnessed in the past. Although we are accustomed to see lower activity during Q3, the low oil prices, concerns in China and US Federal Reserve rate hike as well as the regional political instability have all contributed to lower debt transactions by corporates and weak market performance. We still saw companies interested in issuing debt, however some had to delay their plans to Q4 as they hope for market conditions to improve.”