Interest grows in initial public offerings

Published in MEED, 12 December 2017

In terms of capital markets activity, 2017 was a strong year in the Middle East that saw a surge in initial public offerings (IPOs), coupled with a steady stream of sovereign debt issuances.

The year began with 11 IPOs in the first quarter, largely due to the launch of the Tadawul Nomu on 26 February. Aimed at smaller companies, this parallel market has less onerous listing requirements than the main Saudi Stock Exchange (Tadawul) and attracted seven entrants straight away. Bahrain tried a similar move, launching the Bahrain Investment Market on 26 March, but as of early December had failed to attract any companies.

Subsequent quarters were less active, but there was still a regular flow of deals. There were 28 IPOs across the region through to December, far ahead of the 13 listings last year. In some cases, these listings represented the first IPOs on markets for several years. For instance, Orient UNB Takaful Insurance and Investment Holding Group were the first new entrants to the Dubai Financial Market and the Qatar Stock Exchange (QSE), respectively, since 2014.

In general, Gulf markets dominated the IPO scene in 2017, with the Tadawul and Tehran Stock Exchange (TSE) accounting for more than half the total listings – with 12 and four, respectively. However, at least 10 exchanges saw at least one new listing in 2017, including the Muscat Securities Market with three, and the Bahrain Bourse, Egyptian Exchange and Palestinian Exchange each with one.

The year ended as it had begun, with significant activity. Adnoc Distribution, the retail fuel arm of Abu Dhabi’s national oil company, launched its share sale in late November, ahead of a listing on the Abu Dhabi Securities Exchange in December. A successful flotation is likely to encourage other governments to push ahead with privatisations of some of their own energy assets.

Given the market volatility, the experiences of companies already listed this year have unsurprisingly varied considerably. According to the Arab Federation of Exchanges, Bourse de Tunis, the Egyptian Exchange and the Palestinian Exchange were the only three of its 16 member exchanges to post gains in all three opening quarters of the year, while the QSE was the only one to post consistent losses over that period. The Damascus Securities Exchange witnessed the greatest swing, posting double-digit growth in the first and third quarters, but suffered a steep fall in the second quarter.

Much of these market swings are due to a combination of changing oil prices and local political and macroeconomic developments. Qatar’s poor performance, for example, stems from the boycott imposed on it by Saudi Arabia, the UAE, Bahrain and Egypt since June, which restricted both its international trade routes and some GCC investors’ access to the Qatari bourse. Jason Tuvey, a Middle East economist at London-based Capital Economics, notes that “the outlook for Qatar’s economy over the coming years has continued to deteriorate. This has been reflected in further falls in the stock market.”

Perhaps the strongest performance of the year in the Gulf came from outside the GCC. In Tehran, the TSE’s Tedpix all-share index hit an all-time high in late November amid high trading volumes, surpassing a previous record set in January 2014. Tehran-based Griffon Capital attributed the performance to growth in corporate earnings, falling real interest rates and growth in Iran-EU trade, among other things.

Sovereign debt issuance has been steady throughout 2017, particularly in the Gulf where governments have been trying to plug budget deficits. In the first quarter, Kuwait issued $8bn of five and 10-year paper, and Oman raised $5bn from five, 10 and 30-year notes. There were also smaller sukuk issuances from Bahrain in the opening three months.

Both Riyadh and Muscat tapped into the sharia-compliant market in the following quarter, with sukuk issuances of $9bn and $2bn, respectively. The third quarter saw an unusual deal from Oman, with a $3.55bn loan secured from Chinese banks in August. Riyadh returned to the market with a further $12.5bn conventional issuance in late September, which was followed by a $10bn bond issue from Abu Dhabi in early October. By mid-October, Middle East sovereigns and local authorities had issued close to $60bn of bonds, according to the UK’s market analyst Dealogic. That was far higher than the full-year figure in 2016 of $42bn, which was itself a record.

With oil prices far below the breakeven level of most oil producers, there will be an ongoing need for debt issuance next year. Moody’s Investors Service estimates borrowing requirements for GCC sovereigns will reach $148bn in 2018. However, downgrades of some sovereigns – the most recent being Standard & Poor’s lowering of Bahrain’s rating to B+ on 1 December – will make this a more expensive option for some finance ministries.

Further IPOs of major state assets should help to cover the overspend by governments and reduce their need to issue debt, meaning 2018 is likely to be an active year in terms of both equity and debt capital markets. In particular, the year ahead is likely to be dominated by the listing of Saudi Aramco.

At the time of writing, it was unclear what the timetable for any flotation for the oil giant would be and just where the shares might be traded. The Tadawul is certain to be one venue, but an IPO of this scale necessitates an international listing too. Front runners include London and New York, but Singapore and other Asian bourses are also competing to host the company.

Analysts say they are seeing more firms getting ‘IPO ready’, and cite government privatisations as a key driver of activity. Potential market entrants include other divisions of Adnoc, Saudi Arabian Airlines and Egypt’s Banque du Caire.

Such deals should draw in international investors, and help to make the region’s markets less volatile. That process has also been given a boost by the promotion of some exchanges into widely followed indices. Boursa Kuwait was added to the FTSE Russell Emerging Market Index in September and the Tadawul is expected to be included in the MSCI Emerging Market index in 2018.

“There will be a knock-on effect of raising corporate governance and reporting standards and improving market operations,” said an executive at one major international investment firm. “The market should become a little more efficient and liquid, and a little less volatile.”