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Qatar sells triple-tranche jumbo bond to raise $12 billion

Buildings are seen on a coast line in Doha, Qatar June 5, 2017. REUTERS/Stringer

By Davide Barbuscia

DUBAI (Reuters) - Qatar sold $12 billion in bonds on Wednesday, and drew around $50 billion in demand - the largest order book globally since its bond sale last year and the latest indication of how the country has overcome a boycott imposed by some of its Arab neighbours.

The debt sale, split into tranches of five, 10 and 30 years, was much bigger than the $7.5 billion bond issued by rival Saudi Arabia in January, which had attracted over $27 billion in orders.

It was not clear where most of the demand came from, but the high volume showed that despite a lack of demand from Gulf countries, hampered by the boycott, international investor demand remained strong.

"The political environment in the region remains challenging, however we would expect this bond to have support and buying interest out of Asia, Europe and other Western countries," said Theodore Holland, senior portfolio manager at Fisch Asset Management.

The $2 billion five-year notes offer 90 basis points over US Treasuries, while the $4 billion 10-year and the $6 billion 30-year debt offer 135 bps and 175 bps respectively over the same benchmark, a document issued by one of the banks leading the deal showed.

Earlier price indications were 20 bps higher for the five-year tranche and 25 bps higher for the longer tranches.

The initial guidance looked "attractive," said Sergey Dergachev, senior portfolio manager at Germany-based Union Investment, offering some 30 basis points of new-issue premium - the price an issuer is ready to pay over its existing bonds to attract demand for the new issuance.

Barclays, Credit Agricole, Credit Suisse, Deutsche Bank, QNB Capital and Standard Chartered have been hired to arrange the five- and 10-year notes.

The Taiwanese branches of Credit Agricole, Deutsche Bank and Standard Chartered are joint bookrunners for the 30-year tranche, which is a Formosa bond - a type of debt security sold in Taiwan by foreign issuers and denominated in currencies other than the Taiwanese dollar.

Four of the banks leading the deal have Qatari ownership and there was no U.S. or Japanese bank among the bookrunners.

International banks with significant business ties to Saudi Arabia have been treading cautiously since the Qatar boycott started in 2017, sidestepping public Qatari deals.

A source familiar with the issuance said that the fact that Qatar chose as arrangers the same banks of its previous issuance, in April last year, reflected an extension of existing banking relationships.

Qatar, the world's largest exporter of liquefied natural gas, rated Aa3 by Moody's, and AA-(minus) by S&P and Fitch, does not need to raise financing. It forecasts a budget surplus of 4.3 billion riyals ($1.18 billion) in 2019, partly because of higher oil prices.

But improved market conditions, and the recent inclusion of Qatar and other Gulf countries in JPMorgan's emerging-market government bond indexes might have prompted the sovereign to take advantage of global investor demand for Gulf debt.

"The timing is right to issue the bond," Dergachev said.

Also, more than $10 billion in Qatari debt is due next year, so a large debt sale could be used to pre-fund those maturities.

"I think it's a little surprising that they are coming to market with a very large issue, given the limited budget financing needs," said Timothy Ash, senior emerging markets strategist at Bluebay Asset Management.

"I guess this is in response to GCC index inclusion, and a response to increased demand for the region’s debt."

Last year Qatar raised $12 billion through a similarly structured bond deal, outdoing an $11 billion debt sale by Saudi Arabia.

That deal was Qatar's first test of international investor demand after a boycott imposed by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt. They severed diplomatic and transport ties with Qatar in June 2017, accusing it of supporting terrorism, which it denied.

Partly thanks to rising energy prices, Qatar has largely overcome the economic impact of the boycott.

"Qatar is seen as an improving credit story – they have responded well to the economic blockade, pushing on with structural reforms, diversifying their trade, and improving their resilience," Ash said.

($1 = 3.6400 Qatar riyals)


(Reporting by Davide Barbuscia; Additional reporting by Eric Knecht in Doha; Editing by Larry King)