July 18, 2011, 7:58 AM EDT

By Arif Sharif

July 18 (Bloomberg) — National Bank of Abu Dhabi PJSC, the United Arab Emirates’ second-biggest bank by assets, sold the Persian Gulf region’s first Samurai bond last week as it seeks to widen the pool of potential investors.

Diversifying the source of funding helps banks reduce risk by providing alternatives should other avenues dry up. The yield premium demanded by investors on emerging market bonds increased on mounting concern the sovereign-debt crisis in Greece will spread to Italy and Spain, and as rating companies said they may lower the U.S.

State-controlled NBAD said July 12 it sold 10 billion yen ($127 million) of 15-year Samurai bonds, paying fixed interest of 2.6 percent. Samurai bonds, securities issued in yen by a non-Japanese company, are more likely to attract Japanese investors because they’re subject to the country’s regulations.

“Japanese investors are very quality focused,” Anthony Barklam, the London-based head of debt capital markets origination for central and east Europe, the Middle East and Africa at Mitsubishi UFJ Securities Holdings Co., said in an interview. They “don’t invest to trade the bonds, they invest to hold and get their money back.”

Issuers in the six-nation Gulf Cooperation Council, which includes Saudi Arabia, the biggest Arab economy, and second- ranked U.A.E., have raised $10.7 billion from 21 bond deals so far this year, nearly all of which were dollar sales, according to data compiled by Bloomberg. That compares with $13.4 billion raised from 20 issues in the same year-ago period.

Declining Yields

The average yield on GCC debt has fallen 37 basis points, or 0.37 percentage point, this year to 4.91 percent, according to HSBC/NASDAQ Dubai GCC Conventional U.S. Dollar Bond Index. The yield on National Bank of Abu Dhabi’s 4.25 percent $750 million bond due 2015 was little changed at 2.96 percent today, according to prices on Bloomberg. The rate has dropped 95 basis points, or 0.95 percentage point, from this year’s high of 3.91 percent in March.

Bond issuance from the Middle East and North Africa may beat last year’s $40 billion total because of increased borrowing requirements and a logjam after the Arab Spring, Salman Al Khalifa, Deutsche Bank AG’s regional head of markets said June 14.

Dolphin Energy Ltd., a U.A.E.-based venture transporting natural gas, and Tourism Development Investment Co., a developer of hotels and museums in Abu Dhabi, held back bond sale plans in the past two weeks following the volatility in credit markets due to worries over Greece’s debt.

The extra yield investors demand to own emerging-market debt over U.S. Treasuries widened 13 basis points last week to 314, according to JPMorgan Chase Co.’s EMBI Global Index.

U.S. European Debt

In the U.S., disagreements between President Barack Obama and Republican lawmakers over raising the debt ceiling prompted Moody’s Investors Service and Standard Poor’s to review their credit ratings. Standard Poor’s said July 15 there was at least a 50 percent chance it will lower the U.S.’s top-level AAA ranking within 90 days, while Moody’s put the rating under review for a downgrade on July 13.

Irish debt was cut to non-investment grade by Moody’s Investors Service on July 12 on expectations it will need further rounds of official financing, a week after it slashed Portugal’s rating four levels to junk. Fitch Ratings downgraded Greece by three levels last week to the lowest rating for any country, saying a default is a “real possibility.”

Yen bonds

Still, “we’re not likely to see many Samurai deals from the GCC, region unless issuers are prepared to do a significant amount of work educating investors on their credit,” said Barklam at Mitsubishi UFJ Securities.

While NBAD’s Samurai bond is the first such sale out of the region, other companies have raised money in yen as part of their euro medium-term note programs that were distributed outside Japan. The share of Asia in the U.A.E.’s total imports rose to 48 percent in 2010 from 42 percent in 2002, according to central bank data.

Dubai Holding Commercial Operations Group LLC, a real- estate and hospitality group owned by Dubai’s ruler, raised 10 billion yen from the sale of five-year notes in July 2008, while state-controlled Abu Dhabi Commercial Bank PJSC, the U.A.E.’s third-biggest bank by assets, sold 5 billion yen worth of five- year notes in 2006.

Governments and companies raised 1.57 trillion yen ($19.8 billion) from 56 issues of Samurai bonds so far this year, according to data compiled by Bloomberg. That is up from 841 billion yen from 31 issues in the same period a year ago.

Ringgit Bond

The Republic of Turkey sold the equivalent of $2.28 billion from 10-year bonds in March in the biggest sale of Samurai bonds so for this year. Issuers from Australia and South Korea have been frequent sellers of the bonds this year.

NBAD has also issued bonds in other currencies to attract new investors. It raised 500 million Malaysian ringgit ($166 million) in December from the sale of 10-year bonds. Emirates NBD has sold bonds in Australian dollars, Singapore dollars, Hong Kong dollars and the Thai Baht to diversify its fund base, said Tony Bush, managing director for global funding at Dubai government-controlled Emirates NBD PJSC.

“It’s important that regional issuers diversify their funding sources whenever possible,” Bush said in a telephone interview. “The Japanese market is very deep, but relatively untested for Middle East issuers.”

–Editors: Riad Hamade, Claudia Maedler

To contact the reporter on this story: Arif Sharif in Dubai at asharif2@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net