IFR-Qatar Issues 144A $5 bln bond

IFR-Qatar flexes its muscles with US$5 bln bond deal

LONDON, Dec 5 (IFR) – The wow factor from the State of Qatar’s US$5bn Triple Tranche 144a/Reg S bond issue last Tuesday may not have been as strong as it was the last time the state issued in the international markets, but the deal still showed that the gas-rich country is one of the most highly sought after sovereigns.

“After a fairly quiet period for MENA issuance Qatar was exactly the right name to come to market in size,” said Andrew Dell, head of debt capital markets, CEEMEA at HSBC. “Yet again they have executed the biggest deal of the year and set the benchmark for the region. What a contrast to the travails of Europe.”

HSBC led the deal alongside Citigroup, JP Morgan, Mitsubishi UFJ, QNB Capital and Standard Chartered.

The transaction was not without its detractors, however, with some bankers away from the deal arguing that Qatar (Aa2/AA) gave up more than it might have done in terms of pricing. In truth, though, any EM transaction that raises the amount that Qatar did in such volatile markets has to be deemed a big success.

The sovereign priced US$2bn of 3.125% January 2017 notes at US Treasuries plus 225bp, US$2bn of 4.5% January 2022 bonds at plus 262.5bp, and US$1bn of January 2042 paper at plus 287.5bp. The book was US$9.5bn with 450 orders.

All three tranches tightened in secondary market trading. As of Thursday morning the 2017 bonds had tightened to 219bp over Treasuries, the 2022 was trading at 243bp over, and the 2042s had come in to plus 256bp.

Much of the focus was on the new issue premiums, estimated to be 30bp for the new 10-year and 35bp-40bp for the five-year tranche — a reflection of the state of the market, according to a banker close to the deal.

UNNECESSARY RISK?

But one banker away from the deal said the pricing and size of the deal could have been better if the lead managers had decided to do shorter marketing or even no roadshow. The banker argued that Qatar was exposed to unnecessary market risk as a result of going on the road.

“For a Double A rated sovereign to go for such an extensive market window was strange,” he said.

Another banker agreed that a roadshow seemed unnecessary. “Qatar has intra-day access. Announce the deal one day, then price the next and maybe do a few calls,” he said.

Instead, the bankers argued, Qatar ended up paying more, especially compared with Abu Dhabi’s outstanding bonds. Traditionally, they said, Qatar tends to trade flat to or slightly inside Abu Dhabi (Aa2/AA/AA) because of the former’s rarity value in the market. Abu Dhabi’s state-owned entities give investors more regular exposure to its debt.

So on November 8, for example, the day before IFR broke the story of the Qatar deal, its outstanding 2020 bonds were trading at mid-swaps plus 178bp compared with mid-swaps plus 181bp for Abu Dhabi’s 2019s.

By November 21, two days before the mandate’s official announcement, Qatar’s 2020s had gone out to mid-swaps plus 192bp compared with Abu Dhabi’s 2019s at mid-swaps plus 180bp. By November 28, the day before pricing, the 2020s had widened out further to 208bp over mid-swaps, compared with the 2019s at 172bp over.

“In reality, Qatar paid more for this deal than the leads would claim,” said one of the bankers. “If they did a quick-to-market trade they could have announced new issue levels relative to a Qatar that traded flat to inside Abu Dhabi. Therefore they could have achieved a lower absolute spread through a decent new issue premium but from a lower starting point and potentially for more size.”

Those close to the deal, however, said the criticisms were unfair. One banker argued that as Qatar had not been in the international markets since November 2009, when it raised a record US$7bn, investors were keen to meet the sovereign’s officials. They added that in reality the roadshow, held in London and New York, was only two days — it seemed longer because of a break for the Thanksgiving holiday in the US — and was important for gauging investor feedback.

“The most important thing was to do intra-day execution, and given the size, we needed everything lined up at the moment of announcement. I don’t think we could have been confident of doing that with so many moving pieces without having done extensive marketing,” said one banker involved in the deal.

As for the comparison with Abu Dhabi, another banker on the deal argued that it was unfair. “Abu Dhabi hasn’t issued since 2009. You can’t benchmark against their outstanding bonds,” he said.

Dell added that the transaction was priced at the lowest ever yields across Qatar’s curve. “That’s a success on any day and truly awesome against the global economic and market backdrop,” he said. (For more details on the transaction see “Qatar: Sovereign raises US$5bn”.)

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