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Skip Navigation LinksHome :: Back Issues :: Pricing proves to be crucial

May 2000

Pricing proves to be crucial


Economies in the Middle East are in good shape for forthcoming bond issues, though some sovereign issuers have been deterred by the spread on Qatar's 1999 Eurobond. Lack of sovereign benchmarks has, until now, held back corporate issues but that may soon change.




       
The oil price supports credit fundamentals
With rumours spreading of forthcoming Eurobond new issues from several Arab countries, bond investors more used to analyzing Europe, Asia and the Americas are suddenly turning their attention to the region.
Issuers there have suffered false starts before. Last summer a handful of successful Eurobond issues emerged from the region, but several countries were scared away by the difficulty of pricing deals. Now bankers report that Qatar is discussing details for an issue due to be launched soon and other sovereign issuers are set to follow.
Egypt has announced plans for a debut issue this year and Oman may issue again. Saudi Arabia might be worth a long-odds bet but the cautious should stick with Lebanon's return to tap foreign bond investors. Either way, says Ziad Makkawi, managing director of capital markets at Dubai-based Arabian General Investment Corporation (Agico): "The debt markets in the Arab world are poised to see tremendous growth, which will be reflected on the foreign currency as well as local currency issues."
Now that the turmoil created by the Asian crisis has settled, the emerging markets are enjoying restored confidence from investors, translating into the acceptance of lower spreads from buyers wanting to diversify their portfolios and willing to countenance a little sovereign credit risk. The narrowing of spreads is dramatic, reflected in the JP Morgan EMBI (Emerging Markets Bond Index), which now shows an average spread of 850 basis points over treasuries, down from 1,400bp in 1988.
The Middle East looks a particularly hopeful area for new bond issues. Current account deficits are coming down in the region and with the increase in oil prices over the past two years, countries such as Saudi Arabia are heading towards surpluses. An IMF report suggests that if oil prices stay at or above $25 a barrel, the oil-rich region can expect to boost GDP growth by about 2% over gains otherwise expected. GDP growth is good. Egypt's, for example, is expected to be about 5.6% this year. Inflation is fairly low and, with small borrowing relative to reserves, the region's countries are reining in spending.
Should oil prices dip again, it seems that responsible housekeeping and economic restructuring in the Arab world will maintain these countries' credit viability. "Volatility, by and large, is much lower than in the emerging markets in general," says Makkawi, "and the region's debt, I believe, provides a great vehicle for portfolio diversification and enhancement of global and emerging-market debt portfolios because of the lack of correlation."
Last summer a new receptiveness to the region's debt was apparent when, after more than two years with no sovereign issuer other than Lebanon, Qatar tapped the market for $1 billion. The offer, which was the Middle East's largest single-tranche Eurobond, was oversubscribed, with $2.2 billion of total demand. The 10-year note was attractively priced, with a 9.5% coupon and a spread of 395bp over US treasuries.
In the eyes of some other Arab governments that had thought to follow, the offering was not priced accurately. "The Qataris paid more than they had to," says one Middle East banker, "but then this was the state's debut." The size of the issue had been doubled from an initial $500 million, and the government was adopting a long-term strategy of grabbing investors' goodwill in the hope that contented buyers would support subsequent offerings. Qatar's issue, however, which was perceived to have set a benchmark for the region, dissuaded other countries from tapping the market. Oman was to have been the next Gulf Cooperation Council member to issue a Eurobond, in September 1999, but called off the proposed $400 million deal, citing firming oil prices and an improving economic outlook.
"While those were factors," says Richard Evans, regional capital markets analyst at Egypt's EFG-Hermes, "Oman didn't relish having to offer what may have been around 20bp wider than Qatar's launch spread. Particularly since their last issue had been issued at only a 73bp spread, there was unwillingness to pay such a premium."
Tunisia, however, with a strong rating and seeking only a small issue, was not flustered. The government made a e200 million issue in July and was able to achieve a spread of 280bp on the 10-year paper.
But Egypt, which had already shelved plans for a dollar-denominated issue around the time of the Asian turmoil, was dissuaded from tapping the market. "With Qatar rated higher than Egypt, this issue was one of the main reasons that Egypt didn't do it last year," says Mustafa El-Assaal, fixed-income sales executive at EFG-Hermes. He adds: "The market was not in Egypt's favour. But now, with emerging-market spreads being reduced, the moment is convenient for Egypt to issue."
At the end of April, Egypt's government announced that it would be making its debut later this year. Market sources suggest that it will come in the third quarter of the year. It is unclear whether the notes will be issued in euros or dollars, coming to a total of $300 million to $400 million. No maturity has been given, but the government has said that it intends to offer interest of between 4% and 5%, placing the note at 150bp over Libor.
Mahmoud Mohieldin, senior adviser to the Egyptian economics ministry, says that although the ministry is talking to several leading investment banks, no firm decision has yet been reached. "We are studying the matter," he says "and are investigating the best time for an issue. But as a country that is basically after issuance for the establishment of a benchmark and not for immediate financing problems, we have the flexibility to choose the best time for us."
Corporate issuers are adversely affected by the lack of a sovereign benchmark. In November 1999, healthcare company Lakah Group became the first Egyptian company to tap the Eurobond market. Rated at BB+ by Fitch IBCA, the company issued five-year Eurobonds for $100 million, at 99.5% of face value, with a fixed coupon of 12%. Although a good price for the health-care company, which required dollar funds to expand locally and internationally, the issue was more expensive for Lakah than it might have been had a sovereign bond been issued. The launch spread was 603bp over treasuries, probably 100bp more than it would have paid had there been a benchmark.
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