The Emirate of Ras al-Khaimah made its debut in the US dollar market this week with a globally distributed $400m five year Islamic bond, becoming the fourth Gulf sovereign to sell international bonds this year.
BNP Paribas, Standard Chartered and Liquidity Management House, a Bahrain-based Islamic finance firm, sent out official price guidance of 8%-8.25% on Tuesday morning, before opening the books in the afternoon UK time. In order to lock in orders for the shariah-compliant US dollar benchmark from accounts in Asia, the deal was not wrapped up until early afternoon on Wednesday.
The emirate, which is part of the United Arab Emirates (rated A/A), priced at par and at the tight end of guidance with an 8% coupon and a spread of 560bp over US Treasuries. The deal was four times oversubscribed with $1.65bn of orders from 120 accounts. A diverse range of buyers were involved, with investors from the Middle East, Asia and Europe taking 47%, 34% and 19%, respectively.
This satisfied the emirate’s aim of issuing a globally distributed benchmark, said a banker on the deal. Real money asset management funds and private banks snapped up the deal. The issuer concluded a roadshow in London last week after visiting Abu Dhabi, Dubai, Singapore, Kuala Lumpur, and Hong Kong.
"Like a lot of Middle East issuers, Ras al-Khaimah suffers from having highly illiquid pricing points," said a banker close to the deal. As a result, feedback from the roadshow and recent demand for new Gulf risk was primarily used for pricing guidance.
Missed opportunity
The emirate made its debut in the sukuk market in May 2008 with a Dh1bn ($272m) Reg S five year bond that came at 115bp over three month Eirbor (Emirates interbank offered rate) and was arranged by Standard Chartered. Around 76% of these notes were snapped up by buy-and-hold Gulf investors, strangling secondary market liquidity. The 2013s now trade at 800bp above Eirbor.
In addition, the emirate’s sovereign wealth fund, the Ras al-Khaimah Investment Authority, priced a five year dollar sukuk at 150bp over Libor in November 2007. Those notes were quoted at 850bp on Tuesday. "These sukuk are highly illiquid, since they hardly ever trade, so the initial wide spreads were no true reflection of the credit, which is one reason we printed so far inside," said a banker on the deal.
Bankers hoped the borrower would increase the deal to $500m in order to qualify for inclusion in JPMorgan’s EMBI indices and boost trading liquidity in the new 2014s. However, the issuer opted to cap the deal at $400m as this fulfilled its budgetary needs for the year.
A New York-based emerging markets fund manager said foreign investors’ enthusiasm for the deal had been sapped by the small size of the transaction and by the blow-out $2.4bn bond from Qatar’s Ras Laffan LNG (RasGas) this week.
He added: "You don’t really have any transparency about the willingness of the UAE at the federal level to provide support for the individual emirates — just look at the long-running saga of the UAE’s bailout of debt-laden Dubai." But the banker on the deal was surprised by the reaction of London-based investors. "I think many of them missed an opportunity to invest in a rare credit," he said, adding that the expectation that the 2014s would price close to Ras Al-Khaimah’s outstanding paper was unrealistic given the illiquidity in the cash bonds. The notes traded up to 103 from the par re-offer price, highlighting the demand for the sukuk from under-allocated investors.
This is the fourth sovereign cross-border bond from the Gulf this year, following Abu Dhabi, Qatar and Bahrain, and the third sovereign global sukuk of the year following earlier deals from Indonesia and Bahrain.