LONDON, March 16, (RTRS): Bond market debutant Kuwait overcame growing fears about higher Treasury yields to sell the biggest EM sovereign deal this year, marking another big step in the Gulf region’s evolution into a fully-fledged market. Kuwait was the only Gulf sovereign — bar some of the smaller emirates that make up the UAE — not to have issued in the international markets.
But all that changed on Monday when it raised $8bn through a dual-tranche offering of five and 10-year notes. It means that each of the region’s sovereigns has an established liquid benchmark curve. “The Gulf is a serious market now,” said one banker close to the Kuwait deal.
“Everyone has set up DMOs or departments that manage debt. The region is allocating time, effort and people.” The one missing piece, he said, is the presence of private-sector corporates.
A trader said the Gulf market has transformed itself over the past couple of years. “It’s remarkable to think that the GCC is a full-time job now given where it was 12-18 months ago,” he said. While Kuwait (AA/AA) lacked the wow factor of Saudi Arabia’s record breaking $17.5bn deal in October, it achieved similar results — size, tight pricing and global distribution — and further consolidated the Gulf’s standing in the international arena. European investors took 46 percent of the five-year, while US funds bought 51 percent of the 10- year.
In contrast, MENA accounts got only 26 percent of each bond. Fund managers dominated both tranches. The deal was supported by anchor orders from some of the big guns in the investment community. Demand peaked at $29bn including lead interest, before the book was reconciled at $27bn. Kuwait could have raised up to $9.5bn, but chose not to hit its limit and prioritised pricing instead. Investors, especially those with investment-grade portfolios, were enticed by the yields on offer for such a highly-rated name. The $3.5bn 2.75 percent March 2022s priced at a yield of 2.887 percent or 75bp over Treasuries as leads tightened by 25bp from initial levels.
The $4.5bn 3.5 percent March 2027s printed at 3.617 percent or 100bp over Treasuries, 20bp inside where pricing began. At those spreads, the bonds came at or around fair value based on the trading levels of the nearest comps, Abu Dhabi and Qatar, which are similarly rated. Abu Dhabi May 2021s were quoted at a G-spread of 69bp by a banker away from the deal, while its May 2026s were at plus 89bp. Meanwhile, Qatar June 2021s were at plus 91bp and its June 2026s at plus 104bp. “The five-year 5bp back of Abu Dhabi secondaries so arguably inside a new one. The 10-year is a bit cheaper with Abu Dhabi at 89bp,” said the banker. Leo Hu, senior portfolio manager at NN Investment Partners, who bought the bonds, thought the deal was well priced. “As a first time issuer, they didn’t want to leave too much on the table, but they also didn’t want to destroy the deal. It’s a courtesy to leave something but not too much. So from that perspective it did well, trading up in the secondary, but not crazily performing.
“The credit is very strong — people are not going to get fired because they are buying Kuwait. It’s perhaps a less eye-catching story than Saudi because it’s a smaller size, but $8bn was the right amount, and the bonds were placed into the right hands,” he said. For others, though, the pricing proved too much. “We dropped out after guidance tightening as we thought it was around and through fair value,” said Patty Cao, research analyst at Aberdeen Asset Management. Another EM investor also hoped for more attractive pricing. “It would have been a good deal if the bonds had priced at initial price thoughts, but as expected, strong market conditions pushed spreads tighter.
That said, we still participated in the deal,” said the fund manager in London. Kuwait pushed pricing as tight as possible despite coming amid a healthy sell-off in Treasuries and oil. In the time between the mandate announcement on March 1 and the pricing date, 10-year Treasury yields had jumped around 20bp, making the backdrop much trickier for borrowers. Oil prices, too, were on the back foot with Brent futures falling about $6 over the same period. Kuwait, though, has the lowest breakeven oil price in the region. And while government finances are not as strong as they once were — in net terms the annual budget was in deficit by KD 6bn ($19.6bn) at the end of the last fiscal year — the economy is in good shape. General government debtto- GDP, for example, is less than 20 percent. “Kuwait is the GCC’s best kept secret,” said the lead banker. The bonds tightened in the secondary with the five-year bid at 67bp over Treasuries and the 10-year at 95bp over, according to MarketAxess prices. Bankers say Kuwait will seek to build its curve with future transactions. A draft law to allow issuance of up to 30-years is in process and needs to be passed by the National Assembly.