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Emerging Markets

Bahrain proves global appetite for Gulf deals

The Kingdom of Bahrain this week became the latest Gulf issuer to take advantage of the liquidity and investor demand around the region’s strengthening debt markets.

The Kingdom of Bahrain this week became the latest Gulf issuer to take advantage of the liquidity and investor demand around the region’s strengthening debt markets. It launched a $750m Islamic bond that was increased in size such was the demand from global and regional investors.

The five year ijara-structured, Sharia-compliant bond priced at 340bp over US Treasuries or 290bp over mid-swaps with a 6.247% coupon on Tuesday. The bookrunners were Calyon, Deutsche Bank and HSBC. The borrower completed a roadshow before launch presenting to investors in Kuala Lumpur, Singapore, Riyadh and London.

A surge of orders followed official price guidance in the 350bp area on Tuesday morning, said a banker on the deal.

The deal eventually attracted $4bn of orders from 200 local and global accounts. The bond priced at the tight end of guidance.

Bahrain last issued in March 2008 with a $350m five year Reg S sukuk through Calyon at 75bp over six month Libor.

That deal was sold to a handful of hold-to-maturity investors hungry for high-grade, Sharia-compliant paper. The 2013s are rarely traded and so the issuer’s five-year CDS — as well as investor feedback on the roadshow — provided the pricing reference.

Bankers away from the deal say Bahrain’s five year CDS was trading at between 330bp and 380bp meaning the new bond priced below its CDS levels. Bahrain initially sought to issue a $500m benchmark but, after being almost eight-times oversubscribed, the deal was increased, the central bank said yesterday.

A global reach

By geography, investors from the MENA region bought 55% of the bond, Asia 15%, UK 13%, Switzerland 6%, Europe 7% and others 14%. By investor type, banks snapped up 34%, funds 30%, official sector 17%, retail investors 10%, hedge funds 4% and others 5%.

Bankers say the two-way trading of the 2014s on the break between 100.50 and 100.70 versus the par re-offer price, highlighted the strength and diversity of demand for the deal despite the tight pricing.  "The pricing was tight but the strong aftermarket performance proves this was spot on," said Andrew Dell, head of debt capital markets for the CEEMEA region at HSBC.

Rival bankers were also complimentary. "I was surprised by the size of the transaction since I was expecting a $500m benchmark so the tight pricing levels indicate the strong demand for the sukuk format," said one London-based emerging market debt syndicate head. One lead manager said that the deal benefited from the diversification it offered investors given the dearth of supply from Bahraini names.

"There have been a number of issuers coming out of Qatar and Abu Dhabi but investors saw this Bahrain deal as a good opportunity to buy into the region and diversify within the region so the deal has gone very well."

A number of non-MENA based accounts are probably Islamic finance-orientated investment houses, said one market source. However, bankers on the deal say a large number of traditional emerging market investors — with previous exposure to Gulf sovereign risk — participated.

"There has been demand from all type of accounts — retail buyers as well as Asian accounts looking to increase their allocations thereafter," another lead manager said. He was keen to say that trading in the secondary markets has not been back to accounts in the MENA region. "There has been ongoing buying from European and Asian accounts so we are very encouraged by that," he said.

A unique appeal

Investors agreed. "The pricing was tight but Bahrain has been boosted by its rarity factor and the sukuk format will obviously grab a lot of demand from GCC investors," said Mohieddine Kronfol, managing director at Dubai-based asset management company Algebra Capital. He was also impressed by the broad distribution despite fears of secondary market illiquidity and tight pricing. Traditionally, Gulf fixed income investors hold bonds to maturity — strangling secondary market liquidity. Bankers say the participation of non-specialist investors will boost trading levels in this instance.

During the fourth quarter of 2008, emerging market issuers with large exposures to foreign investors were hit by the flight-to-quality sell-off by non-domestic accounts. This volatility may have tempered the enthusiasm of issuers to diversify their investor base, said analysts. But bankers say issuers have been won over by the merits of the global distribution of debt.

"One of the characteristics of this transaction is the variety of investor type and geographic spread with almost 200 accounts involved and a book of almost $4bn," said Dell, who moved to Dubai in January to drive business while also retaining his regional responsibilities.

"Ideally you want a heterogeneous mix of investors so that there are a range of motivations to both buy and continue to hold the paper." Holders of the sukuk are entitled to share revenues generated by the underlying assets — in this case land parcels owned by the government. This is in contrast with conventional bonds that offer interest-bearing securities.

This Islamic structure also places a ceiling on the size of the deal due to the limited pool of assets. As a result, a $1bn benchmark was out of the question.

A five year deal was chosen as this satisfied demand from regional investors as well as non-specialist global accounts wary of longer dated risk from an unfamiliar product.

A useful benchmark

The proceeds of the deal will help to fund Bahrain’s economic diversification and provide a benchmark for corporate borrowers from the country. "One of the major reasons behind this issue was to establish a yield curve benchmark for longer term Islamic Securities," said Sheikh Salman bin Isa Al Khalifa, the banking operations executive director at the central bank.

Kronfol at Algebra Capital agreed that Bahrain’s 2014s would prove a useful reference point. But he also pointed out that illiquidity, the buy-and-hold profile of investors and the lack of a 10 year sovereign benchmark would limit corporate access. Investors are rewarding under-leveraged regions of the global economy while rising commodity prices have boosted growth expectations in the Gulf. As such, the region’s nascent debt markets are starting to take off.

This issue reaffirmed the market’s appetite to invest in Bahrain’s debt securities and was well received internationally with a major portion of subscriptions coming from outside the GCC," said Salman. The size of the global sukuk markets shrunk between 2007 and 2008 by some 56% to $14.9bn, according to Standard & Poor’s.

There has been a flurry of sovereign and corporate issuance from the Gulf region in recent months. Last week, Qatar Telecom became the third corporate to access the debt capital markets since sovereigns Abu Dhabi and Qatar priced deals at the start of April.

Investor confidence

"This new issuance in the gulf is one more sign of a marked return of investor confidence in the region. Indeed, only a few weeks back, it would have been difficult to imagine that so much debt could be absorbed by the markets," said Philippe Dauba-Pantanacce, senior economist for the MENA region at Standard Chartered.

To date, market fears of an oversupply of Middle Eastern risk have not materialised. "There has been a lot of supply but just look at most of the recent deals in terms of book size and after market performance," said Dell. "If you have the ability, wit and strength to execute at the right time then the deals will go well."

There have been 11 international bond issues from Middle East names this year, amounting to just under $14bn. This compares with 26 transactions in 2008 worth $14bn in total, according to Dealogic. By contrast, the volume of equity capital market issuance is just $1bn this year compared with $30bn for the whole of 2008. As a result, investment banks are making the bulk of their revenues in the region from debt capital market activities.

Oman and Kuwait are rumoured to be planning to launch dollar bonds in international markets after the summer break. Some bankers say Kuwait is more likely to issue but no mandates have been announced. Meanwhile, Emerging Markets can reveal that RasGas has mandated Citi, Credit Suisse and HSBC for a 144A dollar deal expected this month or July. Qatar Petroleum and ExxonMobil own 70% and 30% of RasGas respectively.

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