Commercial Bank of Dubai priced a comeback deal but failed to quell concerns about liquidity in the Middle East.

The lender printed a US$400m five-year bond at par to yield 4% in the first conventional deal by a non-sovereign from the region since Abu Dhabi Commercial Bank pulled a trade in September.

Leads, though, admitted it was hard going. "These deals are getting tougher," said one.

Tighter liquidity has been a feature of the Gulf region for several months, and with year-end approaching many banks are even more reluctant to lend money.

Commercial Bank of Dubai (Baa1/A- by Moody's/Fitch) did manage to get a decent bid from banks, which took 49% of the paper, with private banks and fund managers allocated 25% and 22% each.

What was notable, however, was that the Middle East take-up was less dominant than is typically seen in regional bank deals. Only half was placed with Middle East accounts, while Europe got 28%, and the UK and Asia 11% each.

"Did all the local accounts we'd like come in? No," said a second banker close to the deal. "But we did see local demand." That was in contrast to ADCB, which struggled to generate any significant regional interest for its deal.

"We have to be realistic," added the banker. "Local banks are now takers of cash."

Worries have grown throughout the year that Gulf sovereigns and their banks are coming under pressure from sustained low oil prices.

No Gulf bank had issued a senior conventional bond since Bank of Sharjah sold a US$500m 2020 deal on June 1. National Bank of Abu Dhabi subsequently issued a Tier 1, while a few sukuk have priced in recent weeks.

The Commercial Bank of Dubai trade is making bankers reassess what is possible both in terms of size and price. As the bank was finishing investor meetings, it released initial price thoughts and said it was eyeing a benchmark size.

An update the following day then said to expect an issue size of US$350m at a 4% yield, before the deal was launched and priced for US$400m.

"The concept of benchmark around GCC trades is going to change," said a third banker close to the deal. "Issuers are not looking for huge amounts of liquidity as they are not growing their asset bases."

NEW DYNAMIC

Pricing is also having to take into account the harsher backdrop. Commercial Bank of Dubai has a May 2018 bond that leads spotted at a Z-spread of 175bp, although on Tradeweb the bond was at plus 167bp.

While IPTs were vague at low-mid 200s over mid-swaps, the market took that to mean plus 225-237.5bp. Pricing was then adjusted to a yield as the issuer sought to lock in a specific level. At 4%, the bond was priced in spread terms at 232bp over mid-swaps.

That meant the bond came only marginally inside the wide end of IPTs. As for the new issue premium, many Gulf banks' senior curves are flat. ADCB, for example, has June 2018s that were trading at a Z-spread of 127bp, according to Tradeweb, and March 2020s at plus 133bp.

Under that pretext, the new issue concession for Commercial Bank of Dubai was 45-50bp.

A lead banker, however, argued that a more relevant way investors thought about fair value was to consider the short-end of the curve of a recent issuer, such as Qatar Islamic Bank, which is much steeper.

QIB (A-/A+) printed a five-year sukuk last month, which one lead had at a Z-spread of 135bp. QIB also has October 2017s, which he had at plus 103bp, suggesting the curve was worth 10-11bp a year.

Applying a similar amount for Commercial Bank of Dubai's curve extension gets to around 200bp over mid-swaps, based on where leads spotted the 2018s, though the banker said another 5-10bp should be added for the conventional format.

"The NIP is higher for conventional bonds than sukuk," he said.

Using QIB's curve as a proxy, therefore, and taking into account the conventional format means the new Commercial Bank of Dubai bond came 20-25bp back of fair value.

Irrespective of what the concession is - and it's an unscientific process in this case - there's little doubt that Gulf credits need to pay more to clear their trades.

"It's a new dynamic," said the second banker.

Another would-be issuer, Gulf Investment Corporation, has delayed its deal more than a week after completing a roadshow as it remains unwilling to pay the levels needed to succeed.

Still, more issuers are putting their hats in the ring with National Bank of Oman out with initial price thoughts of high 7% area for a perpetual non-call five Additional Tier 1 offering.

Albaraka Turk will also hope to get support from Middle East investors for a Basel III compliant Tier 2 bond, for which it will begin a roadshow.

Citigroup, ING, JP Morgan, National Bank of Abu Dhabi, Natixis and Standard Chartered were the leads on the Commercial Bank of Dubai deal.