Foreign investors target big rewards with bonds

Once rare in the Gulf, bonds with high rates of interest are an increasingly common sight of the region's investment landscape.

Once relatively scarce in oil-rich Gulf countries, bonds with high rates of interest are becoming an increasingly common feature of the region's investment landscape as foreign investors chase better returns in emerging markets.

Numerous issuances of high-yield debt, or bonds that come with high annual interest rates and below-investment-grade credit ratings, have taken place in the GCC this year.

They include a US$450 million (Dh1.65 billion) Islamic bond sold in February by Dar Al Arkan, a major Saudi developer, that came with a 10.75 per cent profit rate and a $500m bond from the investment firm Kuwait Projects Company at 9.4 per cent interest.

Four other Gulf bonds this year came with rates above 7 per cent per year. Even government bonds have come with higher-than-usual interest, with Dubai raising $750m over 10 years at a 7.75 per cent rate.

Companies and governments borrowing money from international investors through bond sales want to keep the interest rates they pay as low as possible, but they also want to ensure that appetite for the debt is strong. Higher rates generally stoke investor interest in debt - but also imply that it comes with a higher risk of default.

Global investors have recently been snapping up such speculative-grade bonds. This year was the best on record for sub-investment-grade debt, with $287bn issued in the US, surpassing the previous record of $162.7bn last year, according to Bloomberg.

"The trend towards high-yielding bonds will probably continue" in the Gulf next year, said Michael Grifferty, the president of the Gulf Bond and Sukuk Association, "but I would not expect a dramatic increase."