Author: Nigel Dudley
Issuer: State of Qatar
Amount: $1.4 billion
Type of issue: Eurobond with 144A eligibility
Payment date: June 29, 2000
The growing international market in Middle East sovereign bonds took a further step towards maturity when Qatar raised $1.4 billion with a 30-year dollar issue in June. It was the first regional issue with a maturity of more than 10 years and the largest single-tranche Eurobond.
The bond, lead-managed by Morgan Stanley Dean Witter and Goldman Sachs and priced at 385 basis points over the comparable US treasury, also established Qatar as one of the leading Middle East sovereign borrowers. This has built on the success of the $1 billion sovereign raised last year and the $1.2 billion bond for Ras Laffan Natural Gas (RasGas) in 1996. Until now, the Middle East market has been dominated by Tunisia, which is well established in the samurai market, and Lebanon, which in June completed a $500 million, five-year Eurobond.
The issue was also important in reinforcing the growing confidence of the international rating agencies in Qatar. Although the long-term prospects, based on 300 trillion cubic feet of natural gas reserves, are healthy, there had been concern about how maturing international debt would be repaid. Some $5 billion is due between 2000 and 2003.
The bond – particularly the price paid – was greeted less enthusiastically by other potential issuers, such as Oman and Egypt. Oman, which in 1997 raised $225 million through a five-year bond, and Egypt, which was planning a debut bond later this year, are rated lower than Qatar and may find the costs prohibitive.
This is the second year in which Qatar’s pricing has been the most controversial aspect of a deal. Last year, its $1 billion bond carried a 9.5% coupon and a spread of 395bp over US treasuries. Then bankers said it had paid too much but that might be justified by its being the state’s Eurobond debut. Some local bankers and international risk analysts said the 385bp over paid this year’s was also too high. “It shows they either don’t care what they pay for their money or they were extremely desperate to raise it,” says a credit analyst.
London bankers reject this view, saying that the spread was “about right”. According to Nomura International’s Anais Faraj: “They did not pay an excessive amount. Raising this bond was quite an achievement.” Others say that the performance in the secondary market, in which the bond traded initially at a spread over treasuries between 380bp and 385bp was evidence that it had been correctly priced.
The bond was attractive to investors – it was more than two and a half times oversubscribed. Some 70% went to the US, most of which, say bankers in Doha, will be a long-term hold. Some $105 million of bonds were bought by Middle East investors, who are usually more interested in shorter-dated paper, and the rest to Europe and Asia. Investors were impressed by the improvement in Qatar’s financial management in the past five years.
Pricing was only one of the challenges. Initially Qatar had hoped to raise as much as $2 billion, even though investment bankers considered this optimistic. Then, as US interest rates started to rise earlier this year, the bond was nearly pulled, a decision that was only changed when pressure for further rises eased when US inflation numbers came in lower than expected. Even then, there were doubts at the start of the second quarter whether it would be possible to raise $1 billion. Bankers say the eventual $1.4 billion was a vindication of the lead-managers’ strategy. “We had an excellent road show in the US and a high conversion rate of those we talked to,” says Raj Dhanda of Morgan Stanley Dean Witter.
A further challenge is that Qatar fits slightly uncomfortably between investment grade and emerging-market investors. Of the lead-managers, Morgan Stanley ran its sales operation from the investment-grade desk and Goldman Sachs from the emerging markets’ desk. In the end some 60% went to those looking at investment-grade markets and the balance to emerging-market investors.
Despite the high cost, the bond was welcomed by credit analysts, who had worried about Qatar’s debt repayment schedule. This year some $1,145 billion has to be repaid, followed by $1,289 billion next year, $1,439 in 2002 and $1,061 billion in 2003. Repayments then fall off quite sharply to $663 million and $380 million in the next two years. The concern of analysts was not so much the level of government debt – revenues from LNG will ensure there is enough to meet long-term obligations – but that, without the bond, the bulge in repayments would force the state to borrow locally, creating extremely tight liquidity and putting pressure on Qatari banks’ balance sheets.
“Part of the revenue from this bond will convert local debts to foreign debts, increasing liquidity in the system,” says Daniel Ashri, an associate analyst at Moody’s. Ironically, the rise in oil prices has produced such a dramatic transformation in Qatar’s financial position that local economists are worried that there might be too much liquidity. The budget for 1999/2000 is now expected to show a $700 million surplus compared with a $70 million deficit, and the surplus for the next years is likely to rise to $1.4 billion against a forecast of a $764 million deficit – the government figures make the extremely conservative assumption of a $15 a barrel oil price.
After that, with the two natural gas production companies, Qatargas and RasGas, selling more than 10 million tonnes of gas a year to Asia, the budget should move into a healthy surplus. The cautious forecasts for the next two years are characteristic of the approach of finance minister Yousef Hussain Kamal, who, with other senior ministers, is committed not just to prudent finance but to creating a private sector-led economy. The key test for Kamal is whether he will maintain the political consensus to push ahead with the structural reforms. These reforms, he argues, are necessary to transform the government into a “regulator rather than a provider”, and will create a much more efficient economy.
He has already cut back on government departmental spending and staff, and started cutting subsidies in areas like healthcare. Where electricity and water supply companies remain state owned, they will be forced to operate more commercially. The question is whether the healthier budget forecasts lead some in government to argue that the toughest of these measures will no longer be necessary. But the majority view in Doha is that reformist ministers will have the authority to continue with economic transformation and leave Qatar free to return to the market should it wish in the next year.
