Qatar Telecom may rethink $1bn bond cap
Dubai, December 12, 2012
Strong global demand for Qatar Telecom's imminent 10-year bond offering could prompt the company to reconsider its decision to cap the issue at $1 billion, especially if interest from the United States is robust.
Investors are expected to pile into the issue, viewing it as virtually a sovereign issue priced at a small premium to Qatar government bonds and as a rare chance to invest in a corporate bond in the cash-rich state, the world's top liquefied natural gas exporter.
After price guidance was set on Wednesday, the issue from the majority state-owned telecoms operator was bid up +0.375 in grey trading, an indication of strong appetite for the paper, which is backed by Qatar Telecom's (Qtel) solid A credit rating from Standard & Poor's.
Market sources indicated that order books had already topped $11 billion by 1000 GMT.
"There is likely to be strong demand for Qtel as investors are comfortable with "Qatar Inc" overall, and furthermore there is appetite for more corporate paper as much issuance so far has been from the banks and sovereigns in the region," said Chavan Bhogaita, head of markets strategy at National Bank of Abu Dhabi (NBAD).
"Fixed income investors also tend to like telecom companies per se as they have a relatively simple business model with cash flows that are more predictable, and stable."
On Wednesday, Qtel set guidance for its new issue at a spread of between 175 and 180 basis points over US Treasuries for the bond due in February 2023, and indicated it would cap the size at $1 billion.
Options to invest in telecom sector bonds in the Gulf are limited although Bahrain Telecommunications Co recently said it would consider a debut bond issue as part of a $1 billion acquisition financing plan.
In the UAE, Etisalat has set up programmes for both conventional and Islamic bonds, but has yet to issue any.
NBAD's Bhogaita said that although other Gulf telecom debt issues would be well received by investors, many would be first-time issuers and therefore would have to be "realistic" on pricing.
That adds to the appeal of Qtel, whose last venture into the debt market in late 2010 saw the company raise $2.75 billion in a heavily oversubscribed three-part sale.
Dilawer Farazi, portfolio manager at Invest AD in Abu Dhabi, said investors viewed Qtel as a play on the sovereign curve, but with a small premium over Qatar government bonds.
"Investors are typically getting over 50 bps of spread pick-up over the sovereign in an entity that is majority-owned by the sovereign," Farazi said.
"The company is fundamentally strong, and with assets in Iraq, Algeria and Tunisia it has access to markets that should grow."
Qatar issued a $4 billion Islamic bond, or sukuk, earlier this year in a two-tranche deal which attracted orders of over $25 billion in total.
The $2 billion, 3.241 percent tranche maturing in January 2023 was yielding 2.8 percent on Wednesday, according to Thomson Reuters data, about 113 bps over 10-year US Treasuries.
At current guidance, Qtel is offering about 65 bps premium over the sovereign, which should ensure a healthy order book. Two regional traders said they expected the launch guidance to tighten to 175 bps over U.S. Treasuries.
"The reason people are anticipating such tightening is because allocations will not be satisfactory and the paper will be heavily oversubscribed," said a regional fixed income trader, requesting anonymity.
Yields on Qtel's existing bonds have also fallen significantly, reducing the company's borrowing costs.
The $1 billion 2021s were trading at a z-spread of 168 basis points on Wednesday and the $750 million 2025 maturity at 186 bps, according to Thomson Reuters data.
The z-spread is a pricing tool which calculates the number of basis points that need to be added to a zero-coupon yield curve to make the bond's discounted cash flows equal the bond's present value.
Qtel International Finance, a wholly owned subsidiary of Qtel, will issue the bond under its $3 billion global medium-term notes programme, listed on the Irish Stock Exchange. Proceeds are to be used for general corporate purposes as well as to refinance existing debt, ac co rding to the bond prospectus.
Whether the company really needs to raise funding from the debt markets though is in doubt.
Its next bond maturity is a $900 million repayment in 2014 and it has $2.5 billion in loans to repay up to 2015, according to Thomson Reuters data.
Qtel's total debt at the end of September was $9.1 billion, according to an investor presentation seen by Reuters, and the company had $4.5 billion in cash in hand as of September 30.
It is one of the most acquisitive firms in the region, though, and has spent nearly $4 billion this year to take majority ownership of its Iraqi telecom unit Asiacell and Kuwaiti arm Wataniya, Kuwait's No. 2 telecom operator, in separate deals.
Qtel is understood to be preparing a preliminary bid for Vivendi's 53 percent stake in Maroc Telecom, one of Africa's main telecom operators, which the seller hopes will fetch 5.5 billion euros ($7.15 billion).
Qtel has hired JPMorgan Chase to advise, sources told Reuters earlier this month, but is expected to face competition from South Korea's KT Corp, as well as France Telecom, and Etisalat.
The company is due late on Wednesday to price its bond issue, which is 144a-compliant, meaning it has met US regulatory requirements. Strong interest from US investors, usually keen on longer-tenor bonds, could prompt the borrower to add a second tranche ahead of the launch.
Earlier this month, strong demand allowed the Kingdom of Morocco to print a 10-year note inside its euro secondary curve on a swapped basis and add a 30-year tranche to boot.-Reuters