As the world’s sixth largest oil producer, the government of Abu Dhabi scarcely needs external financing. So its debut sovereign issue in July was all the more significant for the precedent it set for Gulf capital markets. “It was our duty as a government to establish this sovereign benchmark in order to help the private sector to get cheaper funding,” Hamad Al Hurr Al Suwaidi, under-secretary of the Abu Dhabi finance department, tells Emerging Markets.
The deal was designed to provide a benchmark for corporate borrowers in the UAE, which issued a record $19 billion-worth of bonds in 2006, four times more than the year before. It boosts opportunities for domestic companies to diversify their funding profile into fixed-income securities, rather than relying on volatile equity markets in the region. It has also substantially raised the international profile of the Gulf in the eyes of international investors.
The emirate issued a $1 billion, five-year deal with a coupon of 5.50% payable semi-annually, and received $2.7 billion in demand, despite a treacherous market in the last week of July. Citigroup and Deutsche Bank acted as bookrunners.
The deal has galvanized moves to improve transparency in the emirate’s public finances, with its management accounts now public for the first time, a prerequisite for a credit rating. But primarily this debut issuance was used as a springboard to market the emirate as a well-diversified economy, and educate a high-grade investor audience about the Middle East risk premium.
“I think the significance of this deal is reflected by the fact that as soon as the rating for this issue came out, credit ratings across the whole region were upgraded,” says Philip Brown, co-head of public sector origination at Citigroup. “This deal has put the region into many investor sovereign-credit portfolios that have not previously invested in the Middle East.”
Neil Shuttleworth, head of EEMEA debt capital markets syndicate at Deutsche Bank agrees. “The GCC region has really only got on the international investor map over the last 18 months, so this deal provides a benchmark for the region as well as getting people to realize the emirate’s growth story,” he says.
As Al Suwaidi puts it: “We would like to tell the world: we have an increasingly diversifying economy that is soliciting international capital.” And this deal did just that.
The deal was priced at 18bp-20bp over the mid-swaps range. This aggressive pricing and the Aa2/AA/AA credit rating reflects the fact that Abu Dhabi is not a classic emerging market. The deal was enthusiastically sold to a high-grade investor base: with US investors buying 42%, Europe 25%, the Middle East 18% and Asia 15%. What’s more, asset managers bought 65% of the issue, while banks took 28% and pension funds 7%.
In fact, such investor turnout, as one banker puts it, also indicates that international investors were falling over themselves to raise their profile at the finance ministry, salivating over the opportunities potentially offered by the state-owned Abu Dhabi Investment Authority, which manages around $800 billion in assets.