Investors Flock To $4bn Qatar Sukuk

Investors flocked to Qatar�s first sovereign sukuk in nine years when it hit the market on 11 July. The issue was sized at $4bn, which set a record for dollar-denominated Shari'a compliant �bonds.� At $24bn the order book was also one of the biggest ever seen. The world�s top LNG exporter secured lean pricing, with the five-year $2bn paper at 115 basis points over benchmark mid swaps and the 10-year $2bn at 155 bps over benchmark mid swaps, writes Melanie Lovatt.

The strong results show that there is considerable pent-up demand for offerings from highly rated issuers that are viewed as safe havens, given that many investors have been sidelined by the Eurozone sovereign debt crisis. Standard & Poor�s assigned an AA rating to the sukuk, while Moody�s Investors Service gave it Aa2. The strong response could encourage other investment grade issuers to approach the debt markets and those currently seeking funding for projects, such as Saudi Aramco and the US�s Dow Chemical, will be eyeing Qatar�s results. It may encourage these two partners to launch sukuk earlier than originally envisaged for their $20bn 3mn tons/year Sadara integrated petrochemical project in Jubail. The kingdom�s first bond was issued in 4Q11 by Saudi Aramco and Total for their 400,000 b/d Satorp export refinery project and sized at SR3.749bn ($1bn � MEES, 17 October 2011). Arrangers have already been appointed for the Sadara sukuk, but with Ramadan due to start later this month, and the quiet holiday period of August fast approaching, the window of opportunity is closing.

The Qatari sukuk secured more attractive pricing than Gazprom�s notes, which were rated Baa1 by Moody�s and BBB by S&P and Fitch. Sold on the same day as the Qatari sukuk, this privately placed paper saw a price of 345 bps over treasuries, with a 4.95% coupon (the coupon is the rate paid by the issuer to the bond holders). The Gazprom and Qatari sukuk followed Bahrain�s $1.5bn 10-year conventional sovereign bond to market. This came in oversubscribed on 27 June and was rated BBB by both Moody�s Investors Service and Fitch (MEES, 2 July). Carrying a coupon of 6.125%, it saw pricing of 437.5 bps over mid swaps.

Demand Remains Strong

Strong order books for the Qatar and Bahrain issues reflect the positive dynamics of the market, said one Middle East bond market expert. Developed markets are experiencing �compromised economies� so investors are turning to other areas and in the current low interest rate environment paper from Qatar and Bahrain gives them �a pick-up in return,� he said. At the same time, the cost to issuers is also low due to investor appetite, making market conditions conducive for both sides of the transaction. �The market is open and as we head deeper into July we don�t really see demand backing off across the debt capital markets. And it�s not just the Middle East. Demand is very strong and lots of deals are being issued,� he added. However, he notes that for the region Ramadan �may provide a natural cut-off to the new supply.�

The narrowing of Qatar�s pricing from 2011 and 2009 (see table) reflects growing demand from Islamic investors and also the continued economic strength of the country itself. Qatar�s LNG revenue has climbed  after an expansion to the 77mn t/y target capacity early last year and its oil earnings have remained high due to robust crude prices. For RasGas, which with Qatargas comprise Qatar�s two LNG companies, it was the first full year that all five trains were fully operational (page 26). Qatar continues to reap budget surpluses and boasts one of the world�s highest per capita GDPs. The prospectus given to sukuk investors said that its budget surplus more than tripled to QR44.5bn ($12.2bn) in fiscal 2011-12, which ended on 31 March. A good result, but this should be viewed in context. The budget was based on a $55/B oil price, which is low compared to market rates. The OPEC Basket price averaged $107.46/B in 2011.

While Qatar has not specified what it will do with the $4bn proceeds from its sukuk, the country has increased expenditure as it prepares itself to implement expansion plans outlined in the Qatar National Vision 2030 and to put in place the necessary facilities for the 2022 football World Cup. Qatar�s budget for fiscal year 2012-13, which started on 1 April, projects total revenue of QR206bn ($56.6bn), up 26.8% from QR162.5bn ($44.6bn) in 2011-12, and total expenditure of QR178bn ($48.9bn), up 27.2% from QR139.9bn ($38.4bn) in 2011-12 (MEES, 4 June). Despite forecast strong revenues, the extent of the expenditure envisaged suggests that Qatar will continue to tap sukuk and bond investors for funding when the markets are attractive.

Qatar last tapped the debt markets in November 2011 when it issued a $5bn conventional bond, notching up the biggest offering from the region that year (MEES, 5 December 2011). It also set a record when it last issued a sovereign sukuk in 2003. The offer was its first ever sukuk, and coming in oversubscribed was hiked by $200mn to $700mn, becoming at the time the largest ever Islamic bond to come to market (MEES, 13 October 2003). It followed Qatar�s fixed rate debut 10-year $1bn conventional bond issued on 12 May 1999 (which had a spread of 395 bps over US treasuries ‒MEES, 17 May 1999) and its 30-year $1.4bn conventional bond which was launched on 22 June 2000 (with a spread of 385 bps over US treasuries � MEES, 3 July 2000). Bookrunners on Qatar�s most recent sukuk comprised HSBC, Deutsche Bank, Standard Chartered, and domestic financiers Barwa Bank and QInvest. Saudi state-owned General Authority on Civil Aviation�s (GACA�s) sukuk issue of 10 January matched the Qatari issue size in dollars ($4bn) but was issued in Saudi Riyals (SR15bn).

Qatar 2009-2012 Bond And Sukuk Issues

Source: MEES.

© Copyright MEES 2012.