The Gulf sovereigns have turned to the private bond market in recent weeks, raising impressive multi-billion dollar bonds even while under attack from Iran. There are many attractions to this sort of funding, especially at a time of such volatility. But public deals would have served these issuers, and the region as a whole, much better.
Abu Dhabi raised $2bn via a private new bond issue on Monday with Goldman Sachs, and $2.5bn with private taps on Wednesday and Thursday last week through Standard Chartered. Qatar placed a new $3bn bond via JP Morgan privately the week before.
It is not just to avoid bond market volatility that Gulf sovereigns might prefer to fund behind closed doors.
So much has been made of the rock bottom levels that some of them have paid in the last year that it must feel like a gut punch to now have to pay more when they are the victims of circumstance. After years of ever tighter levels, it is tough for any issuer to have to stomach costlier funding.
Abu Dhabi, as the most recent Gulf sovereign to issue publicly, has come in for extra scrutiny. Not because of its credit but simply because it had been the last to price a public new issue before the Iran war began. This meant its widening spreads were reported far and wide as it became the most pertinent example of what issuers from the region faced. Abu Dhabi probably did not enjoy the experience and it is doubtful any other issuer would want to provide a more up to date benchmark unless it had to.
All of that considered, it would be a brave debt management office to open itself up to criticism from investors and political masters by coming to the public market without serious need.
Therefore, issuing private placements and not disclosing the pricing allows sovereigns to avoid all this unwanted attention, especially given the sizes available. This gives the issuers that have used it the appearance of being smart, opportunistic funders, making the most of big funds' demand for specific credits.
But a public benchmark deal would have been even better. Firstly, not disclosing pricing may avoid uncomfortable headlines about spreads but it also raises questions. The assumption from some will inevitably be, given the volatility, that these sovereigns paid up — maybe even more than they actually did.
This is a rational assumption. Having a bigger number of investors looking at the deal would be expected to drive pricing in, even if the starting spread implied more new issue premium than usual.
It is quite likely that the final spread would have been wider than before the war began, and the NIP bigger. But these are short term inconveniences. Long term, a thriving and open public market would eradicate any short term pricing pain as investors could be confident issuance was coming and would have fresh pricing references to base valuations on.
The recent private bonds were no doubt a successful exercise for those sovereigns in showing they had access to funding. But surely that was never really in doubt. The far more important question to answer is at what price does public bond issuance clear in the Middle East. The longer that question remains unanswered, the harder it becomes to do so and the less palatable that answer is likely to become.