MS Morgan Stanley

By Rory Jones in Dubai and Avantika Chilkoti in London 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 6, 2019).

U.S. banks are cashing in on a public-debt boom among oil-rich Persian Gulf nations, muscling into lending territory long dominated by rivals.

Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley are leading a corporate- and sovereign-bond spree in the Gulf Cooperation Council, a group of six Arab nations that includes Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain and Oman. U.S. banks have earned four times as much in fees from bond issuance in the GCC so far this year compared with 2015, the year before the region embarked on a debt binge, according to fees data from Refinitiv.

The U.S. banks' improving position in GCC debt in part reflects a new aggressiveness in the region, but it also comes down to petrostates seeking more cash during a period of low oil prices. In total, the GCC countries have issued $150 billion in foreign-currency debt since the beginning of 2016 -- the year oil prices hit a 12-year low, according to Dealogic. That is up from $24 billion in the prior four years, when oil prices were often above $100 a barrel.

"There was not a lot of issuance of GCC sovereign debt 10, or even five years ago. Now there's a lot," said Hasnain Malik, a Dubai-based analyst at Tellimer Group. "U.S. banks have asserted their competitive advantage in debt capital markets."

The emergence of American banks demonstrates the scramble among financial institutions to get a foothold in the Middle East during a tumultuous period of change. Saudi Arabia especially has presented itself as a potential investment destination, landing its stock market on the MSCI's emerging-market index this year, launching a program to develop non-oil industries and planning an initial public offering of its giant national petroleum firm, Saudi Arabian Oil Co., or Aramco.

Bankers consider the debt sales as a way to develop a broader relationship with a country's finance officials. Citigroup last year returned to Saudi Arabia after a 14-year hiatus and Goldman has been hiring investment bankers there.

Morgan Stanley and JPMorgan were the chief arrangers of Aramco's bonds in April, a landmark $12 billion sale that received nearly 10 times that figure in orders.

Already, the debt work has spurred more lucrative business. Goldman Sachs and Morgan Stanley won advisory mandates on the region's recent megamerger: Aramco's $69.1 billion purchase of Saudi Arabia's national petrochemicals firm from the country's sovereign-wealth fund.

Though sparked by the 2014-16 oil-price crash, the region's debt binge has continued as governments spend on economic overhauls and seek to develop domestic capital markets. Big companies also have started tapping more capital-market finance than straight lending. This year, banks have earned nearly the same in fees from debt sales as arranging loans -- a cultural shift in the region, driven by the huge sovereign issuance.

U.S. banks are carving out a niche in territory once dominated by European rivals. The majority of bonds sold in recent years were in dollars, allowing American banks to espouse the virtues of their U.S. networks, according to bankers and regional capital-markets lawyers.

American banks emerged financially stronger from the global financial crisis than some of their European peers, positioning themselves to benefit from Gulf debt sales. JPMorgan employed 30 staff in the region during the financial crisis in 2008, and now has a workforce of 225 across all roles, with about 80 people in Saudi Arabia.

The biggest Gulf debt brokers remain two London-based banks that have long been in the region: HSBC Holdings PLC and Standard Chartered PLC. They have larger operations there than their American peers and were the top fee earners for debt capital markets this year. HSBC in January opened a new $250 million headquarters in the U.A.E., next door to the Standard Chartered Tower in Dubai.

Other European banks haven't fared as well. Deutsche Bank AG and Barclays PLC, both still feeling the financial crisis's effects, trimmed staff in recent years. Bankers from other institutions also left the Gulf, as business looked unpromising in 2015 amid low oil prices. The region's cultural shift to bonds rather than lending also has meant Japanese banks, previously big loan arrangers, have lost fees to U.S. banks.

"A lot of it comes down to just how much the European banks are retreating from their investment banking businesses," said Anthony Simond, an investment manager focused on emerging-market debt at U.K.-based Aberdeen Standard Investments.

The one market U.S. banks haven't been active in arranging bonds is Qatar. Saudi Arabia and the U.A.E. have imposed an economic boycott on their neighbor for alleged support for extremist groups, creating a sticky situation for financiers.

JPMorgan executives in April 2018 informally told Qatari officials they couldn't work on the country's coming bond issuance because it would jeopardize the U.S. bank's relationship with Saudi Arabia, The Wall Street Journal reported, citing people familiar with the matter.

Deutsche Bank, Barclays and Credit Suisse Group AG -- all of which have large Qatari shareholders -- have been the core banks involved in arranging Qatar's sovereign-debt issuance in recent years.

While most economists and credit-rating firms don't consider Gulf states such as Qatar, Saudi Arabia and the U.A.E. overleveraged, some contrarian investors are taking short positions against the region's credit, betting the countries are raising debt too fast.

Economists estimate Oman and Bahrain are the two Gulf states most susceptible to a payment default, although many think Saudi Arabia would come to Bahrain's aid to avoid a financial default. The International Monetary Fund estimates Oman and Bahrain's debt-to-GDP levels this year will reach 60% and 100%, respectively. Citi and JPMorgan have arranged bonds for both states.

Write to Rory Jones at rory.jones@wsj.com and Avantika Chilkoti at Avantika.Chilkoti@wsj.com

(END) Dow Jones Newswires

August 06, 2019 02:47 ET (06:47 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.