Gulf's biggest bond sale is set for pricing record
Dubai, June 6, 2014
An impending bond issue by Abu Dhabi-based telecommunications firm Etisalat may not only be the region's largest deal so far this year, but also set a record for tight pricing as the Gulf becomes more of a mainstream investment destination.
Etisalat's debut bond will replace some of the debt used to fund its 4.2-billion-euro ($5.7 billion) purchase of a majority stake in Morocco's Maroc Telecom from France's Vivendi , said a report in the Gulf Daily News (GDN), our sister publication.
Investor roadshows are due to finish on Tuesday and the firm could then issue a four-tranche deal, consisting of five- and 10-year bonds denominated in US dollars and seven- and 12-year bonds denominated in euros.
The size has not been fixed but some bankers speculate that it will be between $2bn and $3bn - a level that would be easily absorbed by massive investor demand. The largest deal from the Gulf so far in 2014 was Saudi Electricity Company's $2.5bn, two-part sukuk in April.
"This is the type of credit that bondholders love to hold - highly rated, established track record with scope for further growth, excellent cash flow visibility and decent transparency," said National Bank of Abu Dhabi executive director Chavan Bhogaita. The bank is a passive bookrunner on the trade.
"Add the benefits of government ownership and rarity value, and you have a deal that's firmly on the radar screens of investors."
Beyond the factors specific to Etisalat, major trends are working in favour of the issue. Political turmoil in other emerging markets, such as Ukraine and Thailand, has left investors searching for attractive alternatives.
Meanwhile, the Gulf's strong economic performance during the global instability of the past few years is helping to establish it for the first time as a mainstream investment destination for global funds - a trend underlined on the equities side last month by index compiler MSCI's upgrade of the UAE and Qatar to emerging market status.
At the same time, debt issuance by companies in the Gulf has decreased in recent months as strong economies have made it easy for firms to reduce leverage and borrow from banks.
So high demand is fighting against low supply, pushing credit spreads down. This could mean Etisalat prices portions of its bond at under 100 basis points above mid-swaps - a first for any debt issue from the Gulf, including sovereign issues.
The European Central Bank's decision to cut its deposit rate below zero, in order to weaken the euro and discourage investors from hoarding cash, is also conducive for the Etisalat bond.
"Negative deposit rates in Europe will push investors to snap up a credit like Etisalat. Traders can leave the currency unhedged without a worry and make strong bucks from this buy," a senior banker with a foreign institution said.
The bullish mood in the Gulf's bond market can be seen in Abu Dhabi state fund Mubadala Development Company, which issued a $750 million, eight-year bond in April at a spread of 120 bps over seven-year US Treasuries. The bond was trading at 74 bps over its Z-spread on Tuesday.
This points to Etisalat pricing at a spread in the double digits above mid-swaps even for the longer tenures. Such a result would surpass the 115 bps over midswaps achieved by the Qatar sovereign with its five-year sukuk in July 2012, and the 10-year trade from Abu Dhabi National Energy Company in April this year at the same figure. - TradeArabia News Service
