Gulf Arab capital markets, including issuance of Islamic bonds, will remain sluggish well into the year as a result of Dubai's debt troubles and spillover effects from Greece's fiscal woes, bankers said. Last year's sukuk volumes were stable from 2008, but the market was almost entirely held up by sovereign and quasi-sovereign issues. Just when the industry prepared to accept private sector issuers towards the end of year, Dubai's debt restructuring rocked markets, effectively shutting down Gulf Arab fixed-income issuance, both conventional and Islamic. “Realistically, debt and equity markets in this region will remain subdued until well after the summer,” said Frederick Stonehouse, head of strategic mergers and acquisition at Bahrain-based Unicorn Investment Bank. Stonehouse told the Reuters Islamic Banking and Finance Summit in Bahrain that regional markets were also waiting for banks to report their 2009 earnings and how companies are able to refinance debt coming due over the coming months. “Until all of that is settled I don't think anybody is going to take major bets between now and the summer,” he said. Bahrain's Gulf Finance House last week reported a $728 million full-year loss and this month escaped default on a $300 million loan by striking an eleventh-hour deal with lenders to roll over one third of it. “I think the market is still finding its feet in the capital markets,” said Safdar Alam, head of Islamic structuring at J.P. Morgan. “In Q3 I'd expect stronger credit issuance to come to the market,” he said. Saudi real estate developer Dar Al Arkan last week was the first issuer in the region in 2010, but could only raise $450 million whereas bankers had expected up to $750 million. Bankers said that the region was both hit by the debt troubles in Dubai as well as Greece's fiscal woes. “Now the market is distorted due to global news,” Afaq Khan, chief executive of Islamic banking at Standard Chartered Bank told the summit in Dubai. However, bankers feel there was still demand for strongly rated papers from sovereign or quasi sovereign issuers. “There's excess liquidity in the market looking for quality assets,” Khan said. Simon Eedle, head of Islamic banking at Credit Agricole Corporate Investment Banking said investor interest in the region shifted away from private equity and real estate funds to money market funds. “There's not enough instruments to support the growth of money market funds,” said. “(Demand) is for strong rated paper, it's not for unrated paper and I think some of the money markets funds I've spoken to have taken unrated paper out of what they are allowed to buy,” Eedle said. The financial crisis has brought to the surface a severe lack of transparency in the Gulf Arab region, where few private sector companies are rated and some have cancelled ratings when they started to be downgraded during the downturn. Bankers also said that international investors are now refining their view of the Gulf Arab region and that issuers from countries with stronger fundamentals such as Qatar, Saudi Arabia and Abu Dhabi will see some investor demand.
