The markets are looking fairly quiet as we go into the Holiday season both within the GCC as well as in the U.S. I thought I would take a moment to bring to your attention, a factoid that I found very interesting. If you think back to last week, and the fervor surrounding Qatar's $7 billion bond issue, the largest emerging market sovereign bond issue EVER, I remember spending a lot of time looking at the yield spreads between the new Qatari bonds and the existing Qatari bonds – trying to determine at what point the new issue looked attractive. The fact that the books were in excess of $28 billion, leads me to believe that global fixed income investors thought it was very well priced and attractive, regardless of the revised pricing – who else is successfully raising debt in today's markets and at what levels?
The Republic of Panama, a Central American nation bordered by Costa Rica and Colombia, rated Ba1, BB+, BB+ by the rating agencies (sub-investment grade) raised $1 billion in the global debt markets at around the same time as Qatar's mammoth offering (November 16, 2009) through a 10 year bond. The table below highlights the details of that issue vs. Qatar's existing and new 10 year bonds.
Sovereign | 10 Year CDS Level | Issue | Pricing | Coupon | Yield at Re-Offer | Current Offer Yield | |
Republic of Panama (Ba1, BB+) | 153.1 | Panama 5.2 01/20 | T + 187.50 | 5.20% | 5.22% | 5.01% | |
Qatar (Aa2, AA-) | 99.3 | Qatar 5.25 01/20 | T + 195.00 | 5.25% | 5.28% | 5.16% | |
Qatar (Aa2, AA-) | 99.3 | Qatar 6.55 04/19 | T + 380.00 | 6.55% | 6.59% | 5.08% | |
Wow – So, Qatar, a country with the fourth largest proven hydro carbon reserves in the world, the largest exporter of LNG in the world, fiscal surpluses in excess of 10% of GDP and an average current account surplus of 30% of GDP issues a bond that is priced at and trades at a discount to a comparable bond issues by the Republic of Panama, a country with a significantly higher CDS level and a lower rating???
Herein lies the rub – although we have seen yields on regional credit contract dramatically over the past months, I continue to be bullish on the region. I believe that we have yet to start truly comparing the levels that regional fixed income offers vs. comparable bonds/sukuks offered by other emerging markets. As confidence in the region continues to grow, I believe that we will see yields contract further – more later on comparisons between sovereigns and corporate debt issued by other emerging market nations compared to the GCC.
Not to make an argument to buy Qatari paper at current levels (happy to take that offline), I will, however, say, that if I were long Qatari paper on my books at this time, I would definitely not be a seller. Fast money seems to be out of the picture, and I believe that this is the kind of credit I would want on my books, particularly going into year end.
GE Sukuk – As mentioned in yesterday's note, the sukuk was better offered, and traded down to the 98.50 levels on very weak volumes. Because of how the sukuk was priced, I don't think a massive run was predictable in the secondary markets, but I don't think we thought it would trade down to below re-offer prices. The reason why this happened, I believe, is that there were some short term players, who reacted the way they usually do when new issues don't pop – they sold. This is a very different issue, with buyers who are atypical to the usual buyers of local deals – I believe that we will see the price of this bond steadily move up in the near term, as investors realize the value of holding a quality credit like GE on their books to diversify from the usual suspects.
When an investor is looking for sukuk exposure, and is looking for investment grade names, usually the list is fairly narrow, and is always highly skewed towards Dubai names. Names like DIB, EIB, DP World, Tamweel, DIFC and JAFZA come to mind immediately. So, if you are looking for ex-Dubai, investment grade sukuks, your universe is quite narrow – the names you have are CBB, QREIC, RAK, TDIC, Petronas and Sarawak. GE, I believe, offers a great way to diversify your portfolio, while maintain a very high credit quality. The table below compares the yields offered by these non-Dubai names compared to the GE Sukuk (leaving off Sarawak, as it matures in December).
Issuer | Country of Risk | Rating | Issue | Offer YTM |
Central Bank of Bahrain | Bahrain | A, A | CBBISC 6.247 14 | 4.00% |
TDIC | UAE | Aa2, AA, AA | TDICUH 4.949 14 | 4.21% |
Ras Al Khaimah | UAE | A, A | RAKS 8 07/22/14 | 5.60% |
QREIC | Qatar | A2, BBB+ | QRESQD Float 12 | 3.39% |
Petronas | Malaysia | A1, A-, A | PETROL 4 1/4 08/14 | 3.99% |
GE Capital | USA | Aa2, AA+, AA+ | GE 3 7/8 11/26/14 | 4.01% |
So, if we compare the GE Capital to other 5 year (approximate) sukuks that have a high credit rating, we can see that it is trading pretty much in line with the likes of Petronas and Bahrain, while offering a far superior credit rating. It's trading a small discount to TDIC, which would be the closest to it, in terms of credit rating. At the end of the day, I believe that this is an excellent credit, which allows regional fund managers to own quality name, with a decent yield, and also allows them to diversify away from the region. I believe the downside is limited here, and upside recovery will be steady. To move away from more volatile names, and add stability going into year end, I would look to add GE Sukuk with a 4% yield at this time.
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