Thursday, 20 September 2018

Issuance race begins

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April alone saw two sovereigns and a corporate reopening the market for the Gulf borrowers in style. Their success clearly paves the way for more issuance from the region while banks continue competing to capture market share. Bakyt Azimkanov writes.

The race between the A-list investment banks to land big-sum Gulf tickets has intensified as more borrowers in the region plan to access the international bond markets to finance ambitious growth projects. Lead managers are using various tactics from innovative bond structures to relationships to target the untapped investor base.

About US$15bn of potential supply is expected from Abu Dhabi alone, while Qatari companies are planning to attract more than US$15bn through the sale of bonds. New issues from other Gulf states are likely to follow, Bahrain being one of them as it gears up to price its US$500m five-year sukuk this month. Then, one senior fund manager in New York warned, "investors may become engulfed by Gulf supply".

Impressive start

As April began, on the first day, the Emirate of Abu Dhabi (Aa1/AA/AA) launched the then largest sovereign bond from the Gulf Co-operation Council when it priced its dual-tranche US$3bn in line with revised guidance. Abu Dhabi priced a US$1.5bn 5.50% five-year deal at 99.346, or 400bp over US Treasuries, down from the initial guidance of 425bp, yielding 5.652%, while a US$1.5bn 6.75% 10-year offering came in at Treasuries plus 420bp, below the previous price talk of 437.5bp, with a reoffer price of 99.242, yielding 6.856%. Citigroup, Deutsche Bank and JP Morgan acted as join bookrunners, while Abu Dhabi Commercial Bank and National Bank of Abu Dhabi came in as co-leads. These bonds are a part of the Emirate's US$10bn Global MTN programme.

A day later, the State of Qatar (Aa2/AA–) followed with a similar size when it printed its increased US$2bn 5.15% five-year offering at 99.90, or Treasuries plus 340bp, below the initial guidance of 350bp, yielding 5.171% and a US$1bn 6.55% 10-year deal at 380bp, below the previous price talk of 387.5bp, with a reoffer price of 99.682, yielding 6.594%. Barclays Capital, BNP Paribas and Goldman Sachs led the deal, while Qatar National Bank acted as co-lead.

Unofficial guidance for the Qatar deal was heard at 330bp over Treasuries for the five-year deal and at Treasuries plus 350bp for the 10-year offering. Then some bankers in the Gulf had been too optimistic, however, as they expected the Qatari five-year sovereign tranche to price in the high 200bps.

When the deals were announced, there were concerns about exactly how much liquidity would be available to the sovereigns and whether the market would have enough appetite for two benchmark offerings in rapid sequence; the high quality of the credits and the scarcity feature attracted huge interest in both trades. However, the Emirati capital – whose debt to GDP ratio at the time was less than 1% – priced outside of lower-rated Qatar. Apart from the CDS difference, Qatari protection then being 80bp–100bp inside Abu Dhabi's, the Dubai factor was named as one of the reasons for the pricing results.

As the United Arab Emirates' capital, Abu Dhabi is obliged to rescue the former boom-sheikhdom Dubai in the case of it failing to pay its US$80bn debt, which, in turn, would move Abu Dhabi's debt to GDP ratio to 20%. Last, low commodity prices were playing against the petrochemical-driven Emirate despite its having stress-tested oil down to US$30m per barrel.

Abu Dhabi is the home to the world’s largest sovereign wealth fund – Abu Dhabi Investment Authority – worth about US$875bn and contributing 90% to the UAE's budget. On the other hand, the world's largest liquefied natural gas exporter, Qatar, has lower geopolitical risks in the region and its gas revenues are set to double, with the rarity factor along with stronger fundamentals playing their role in pricing.

Towards the end of April, on the 29th, Mubadala Development Company (Aa2/AA/AA) tightly priced its maiden two-part US$1.75bn Reg S/144a benchmark. The investment firm, which is 100% owned by the Abu Dhabi government, was the first Gulf corporate to tap the Eurobond market this year, and indeed the first since last summer, when on July 24 2008 the Abu Dhabi National Energy Company (TAQA), rated Aa2/AA–, raised US$1.5bn from a dual-tranche Reg S/144a deal.

Mubadala placed a US$1.25bn 5.75% five-year deal at 99.019 to yield 5.98% or 395bp over Treasuries, while the US$500m 7.625% 10-year offering came at Treasuries plus 462.5bp with a reoffer price of 99.278 to yield 7.73%. Citigroup, Goldman Sachs and RBS jointly led the deal. A day before, the leads released official price guidance at 400bp over Treasuries for the five-year piece and Treasuries plus 470bp for the 10-year portion. This was inside price whispers heard earlier of 412bp for the five-year and 467bp for the 10-year offering.

With a significantly oversubscribed orderbook, Mubadala's inaugural bonds were trading higher in the secondary market the next day. On a price basis, the 2014s were at 100.25–100.375 while the 2019s were at 101.25–101.375. Mubadala's deal was really priced with the Abu Dhabi curve as the main comparison. At 395bp over Treasuries, the five-year tranche priced inside the Abu Dhabi sovereign bond. Mubadala's senior notes were around 100bp–120bp wider than where the Abu Dhabi US$3bn dual-tranche was trading at the time of pricing. Then, the sovereign 2014s were quoted at 295bp bid over Treasuries yielding 4.873% mid, while the 2019s were then seen at Treasuries plus 340bp for a yield of 6.373% mid.

Sovereigns and corporates line up

The Kingdom of Bahrain (A2/A/A) is expected to make a splash in the bond market by June. It is looking to bring a US$500m five-year sukuk through Calyon, Deutsche Bank and HSBC. The Kingdom is also planning a BD250m three-year domestic issuance. Bahrain has a strong investor following and usually prints one Eurobond a year. Last year, it printed 26 Sharia-compliant bonds worth US$716m, making it the Gulf's most prolific sukuk issuer.

Although the Sultanate of Oman (A2/A) has no acute need for external financing, it has become the latest Gulf sovereign to consider tapping the international bond market. It is well-placed to do so and has ample resourced to fund its deficits in 2009, 2010 and beyond. Bankers in Dubai said that if Oman prints a Eurobond, the issue should prove popular due to its being a debut. The State of Kuwait (Aa2/AA–/AA) has also hinted at possible new offerings.

The Kingdom of Saudi Arabia (A1/AA–/AA–) has no plans to print international debt securities but the Saudi Arabian Monetary Authority's governor, Muhammad al-Jasser, last February called on Saudi banks to issue bonds to raise additional finance and ensure long-term funding access to strategic projects. The corporate space is expected to be dominated by borrowers from the Emirates. Origination managers believe Mubadala's success has blazed a trail for more new supply and attention will now turn to the next issuer to emerge from the Gulf's US$50bn-plus issuance pipeline.

Abu Dhabi’s Tourism Development and Investment Company (TDIC), rated Aa2/AA/AA, is understood to have mandated Citigroup and Goldman Sachs for a benchmark offering. Another Emirati corporate, Dolphin Energy, is planning a bond poised for June. BNP Paribas and RBS are believed to have won the mandate for the offering, which is part of the US$3bn refinancing package. RBS is the financing adviser on the overall refinancing, which will include an Islamic tranche.

Emaar Properties is considering raising US$4bn from bond and sukuk sales. Half will come from its existing EuroMTN programme, with the other US$2bn coming from the sukuk issuance programme to which HSBC and RBS have been mandated as leads. No timescale has been revealed but it is assumed nothing will happen until after July.

The Abu Dhabi Water and Electricity Authority (ADWEA) head of privatisation Abdulla al-Nuaimi last month said that the company could tap the bond markets. The state-owned commodity investment firm in Abu Dhabi, International Petroleum Investment Company (IPIC), rated Aa2/AA/AA, has no pressing needs to raise money, according to its managing director, Khadem al-Qubaisi. However, some syndication officials believe IPIC could tap the market sooner than expected as it is seeking a US$5bn to refinance its recent acquisitions.

Apart from the US dollar market, Abu Dhabi-based borrowers are keen to raise funds through Samurai bonds. Abu Dhabi Commercial Bank, Abu Dhabi Investment Authority and TAQA are all on the waiting list to print yen offerings. The shareholders of Union Properties in January approved the issue of a non-convertible bond worth Dh2.5bn to strategic investors.

Qatar's Ras Laffan Liquefied Natural Gas Company (Aa2/A/A+) is considering raising funds through its US$10bn bond issuance programme. Goldman Sachs and Lehman Brothers led the previous two deals. Now, however, investment banks are lining up to land the big Qatari ticket. In the last five years, it has attracted US$6.05bn in the international debt capital markets. Bahrain Telecommunications Company (Batelco) is planning to raise up to US$1.5bn to finance its expansion into Africa.

Unicorn Investment Bank, a Bahraini financial institution, is planning to sell US$425m in sukuk by August. The proceeds from an ijara-structured issue will finance the bank’s expansion plans in Asia and Europe. In domestic markets, Bahrain's Al-Salam Bank and Tadhamon International Islamic Bank in January signed a deal to issue sukuk in manfaa format in Saudi Arabia worth SR857m with Rawacheen al-Hijaz appointed as lead manager.

Investcorp (Baa2/BBB/BBB) is eyeing the Malaysian ringgit market and held a non-deal roadshow through Aseambankers last year for a possible debut in the world's largest domestic sukuk market. It is expected that the Gulf names will animate screens in the coming months as more supply from the region is due to come.

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