On the threshold: After a period of decline, the bond market is poised for expansion

Historically, Kuwait has played a major role in regional debt markets. The country has been the source of bond issuances of various sorts and sizes since the 1960s, making it one of the oldest bond markets in the GCC. Through the early and mid-2000s the nation’s domestic debt market grew steadily, driven primarily by government-issued debt offerings. The expansion during the first half of the decade was in line with the regional bond market, which grew substantially during this period. According to data from the Kuwait Financial Centre (Markaz), a leading local investment firm, between 2003 and 2009 bond and sukuk, or Islamic bond, issuances from Kuwait were worth just under $100bn, which was equal to around 40% of total GCC bond and sukuk issuances during the same period.

DECLINING DEBT SALES: In the wake of the 2007-08 international financial downturn, however, Kuwait experienced a decline in debt sales. Issuance bottomed out at less than $1bn in 2010, for example, compared to more than $15bn the previous year. Despite a slight recovery in 2011 and 2012, the local market currently faces a number of challenges. While Kuwait was a major bond issuer in the pre-crisis period, it is important to note that government debt made up around 93% of total issuances from 2003 through 2009, for example, which was substantially higher than most of the country’s neighbours. Corporate issuance was low in that period, because most local investment firms relied on short-term bank credit for financing, and these issuances dropped off further after the downturn, despite the government raising sovereign issuance in an effort to encourage private-sector listings.

Overall bond issuance has remained somewhat depressed in more recent years as well, though there have been a few encouraging listings since the end of 2011. In December 2012, for example, Burgan Bank, a subsidiary of the Kuwait Projects Company (KIPCO), an international investment group, successfully issued a 10-year, KD100m ($357m) bond. The listing, which was the single largest local currency debt issue in Kuwait’s history, was reportedly nearly four-times oversubscribed, which points to a substantial amount of latent demand for fixed-income instruments in Kuwait.

The most recent issuances were by the United Real Estate Company (UREC) in June 2013. UREC issued a $127.8m, five-year fixed bond and an $82.5m, five-year floating note, both arranged through Burgan Bank, Gulf Bank, and the KIPCO Asset Management Company.

Another growth driver is the state’s KD30bn ($107bn), five-year National Development Plan (NDP), which is expected to get under way before the end of 2013. A potential rise in investor confidence as a result of increased market transparency and oversight, as well as the scheduled addition of a handful of new products and services at the Kuwait Stock Exchange (KSE) before the end of 2013, could also encourage growth.

Finally, a new regulatory framework for the sukuk market, which is expected to come into effect in the near future, will likely result in substantial and sustained growth of sharia-compliant issuances in Kuwait.

KEY PLAYER: Kuwait was a major source of debt issuance well before many of its neighbours. Between 1968 and 1979 more than 60 corporate bonds worth around KD400m ($1.42bn) in total were issued in the country, according to historical data published in a 2001 report released by the Middle East Capital Group, a Lebanon-based financial institution. “There was a very active bond market in Kuwait in the 1980s, driven largely by a handful of major investment firms,”

Issam AD Alusaimi, an information technology consultant at the KSE, told OBG. “Since then, however, many of the companies have disappeared and bond issuance activity has slowed substantially.” Indeed, from 1992 through 1999 corporate bond issuance in Kuwait was worth around KD157m ($560.7m), compared to $597m in Bahrain over the same period, for example.

PICKING UP: From 2003 to 2009 new bond and sukuk issuances from the government of Kuwait and Kuwait-based firms were worth $99.7bn in total, which was equal to 40.3% of GCC issuances of $247.7bn over the same period. The Central Bank of Kuwait (CBK), which is the source of all of the government’s fixed-income activity, was responsible for 92.9% of domestic issuances during this period. With a mandate to manage public debt and maintain domestic liquidity levels, the central bank issues three debt instruments, namely Treasury bills (T-bills), CBK bonds and Treasury bonds ( T-bonds). For the period 2003-09, short-term T-bills accounted for about 47% of sovereign debt issuance, while short-term CBK bonds made up 28% and long-term T-bonds made up 25%.

IN FIGURES: Kuwait-based corporate entities issued 65 bonds worth $7.1bn in total during the period 2003-09. Corporate debt issuance peaked in 2006, at just over $2bn, before falling to $1.25bn in 2007 and to around $670m in 2008. In 2009 a $500m debt offering from KIPCO was the sole corporate bond issued in Kuwait. Total issuance in 2009 was around $15.2bn, with the great majority of this being in short-term T-bills.

In an attempt to boost corporate issuance, the government has sold short-term debt on an annual basis, while corporate issuance over most of this period was somewhat weak. In 2010 the country saw two major new debt listings from the private sector. In June the UPEC, a KIPCO subsidiary, successfully completed a KD40m ($143m) issuance; and in July KIPCO issued a $500m debt instrument under the firm’s $2bn Euro Medium-Term Note (EMTN) programme.

Beginning in late 2011, however, corporate bond issuance began to pick up in Kuwait. In December 2011 the Commercial Facilities Company, a local credit and finance group, issued a KD50m ($178.6m) bond, which was the first local currency issue since the UPEC listing in June 2010. In January 2012 KIPCO issued a KD80m ($285.7m) debt instrument, which was the country’s largest-ever debt local currency issuance at the time. Additional issuances in early 2012 included a KD26.5m ($94.6m) bond put forward by the Al Argan International Real Estate Company and a KD22m ($78.6m) listing by Markaz. Finally, in late December 2012 Burgan Bank carried out its KD100m ($357m) issuance, which, as previously mentioned, eclipsed KIPCO’s KD50m ($178.6m) listing to become the largest ever dinar-denominated issuance in Kuwait’s history.

The sukuk segment is considered an important component of Kuwait’s debt market. The Commercial Real Estate Company issued the country’s first sharia-compliant bond – a $100m offering – in 2005. Before the global downturn, sukuk issuance increased substantially. By the end of 2009, 15 Islamic bonds had been issued in Kuwait, including a $200m sukuk from the AREF Investment Group and a $475m sukuk by the National Industries Group Holding. After the crisis, the sharia-compliant market dropped off considerably. In the 2010-12 period there were few new sukuk issuances in the country (see Islamic Financial Services chapter).

GROWTH DRIVERS: The jump in corporate issuance since late 2011 can be attributed to several factors. As of early 2012 credit issuance at Kuwait-based banks remained relatively low, despite high liquidity at most banks and forecasts of broad economic expansion over the course of the year. Additionally, the CBK, which manages the dinar’s peg to the US dollar, has been forced to lower interest rates considerably in the years since the downturn. Yield spreads on one-year T-bonds have compressed considerably over this period, from around 6% in 2006-07 to 1.25% as of March 2012, according to data from the central bank.

With these monetary conditions in mind, issuing bonds is seen as an attractive way to secure financing, and regulatory changes are also expected to have a positive effect on the bond market. In May 2012 the KSE rolled out a new trading platform. Like many of its peers in the region, Kuwait has never had a formal mechanism for secondary debt trading activity. The new system, which was developed by Nasdaq OMX, the largest bourse operator in the world, can handle a wide variety of products, including fixed-income instruments. As of early 2013 the system was calibrated to deal solely with equities, though the KSE has announced that it plans to turn on the bond feature in the near future.

ISLAMIC ISSUES: Due to a lack of comprehensive sukuk regulations in Kuwait, all Islamic bond issuances from local firms have been issued outside the country, with Malaysia a particularly popular destination. As of early 2013 a draft law to establish a legal framework for sukuk issuance was making its way through parliament. Provided the law is passed in the near future, Kuwait could benefit substantially from growing global demand for Islamic bonds. In recent years sukuk have grown in popularity in Islamic and conventional financial services sectors alike, due to their lower cost structure and transparency. “Firms will seek funding wherever money is,” said Issam Z Al Tawari, the chairman and managing director of Rasameel Structured Finance, a local Islamic investment company. “Even Chinese companies have issued sukuk in the Malaysian market because it was cheaper.” Indeed, with worldwide sukuk issuance up 64% year-on-year in 2012, according to data from the ratings agency Standard & Poor’s, it seems the market for Islamic bonds will continue to expand rapidly.