The recent $3 billion bond issuance from Qatar saw tight spreads as the dual tranche senior unsecured notes found good investor interest, but value pickup could be limited.
The $1 billion of three-year bonds priced at US Treasuries plus 30 basis points (bps) were well inside the guidance of UST + 60bps. The pricing on the $2 billion 10-year bonds tightened to UST + 45bps from initial price thoughts in the plus 80bps area.
The combined order books came to near $12 billion, although down from a peak of $17.5 billion as the pricing tightened.
“The issuer did not leave much on the table for investors as the final pricing on both tranches was in-line with our fair value estimates. We also see a limited relative value pick up for these bonds versus similar rated Abu Dhabi sovereign bonds that are issued by a much larger and diversified economy than Qatar,” said Amol Shitole, Head of Fixed Income at Dubai-based Mashreq Capital.
Despite the tight spread, demand for the top-grade debt—Qatar is rated Aa2 by Moody’s, on par with the UAE, and AA with stable outlook by both S&P Global and Fitch Ratings– came from investors across the United States, UK/Europe, and Asia. The MENA region also accounted for a chunk of the demand as regional banks have typically been the biggest buyers of such high-quality sovereign credit.
The proceeds from the new issuance could be used to repay $2 billion debt maturing in April 2025. In a September report, analysts at Fitch Ratings said the government may continue to replace upcoming maturities in 2025. “The subsequent debt path will depend on how the government chooses to deploy its fiscal surpluses,” the ratings agency said.
“That said, we believe the new issuance was more opportunistic than to cover any funding shortfall. The country has been running a twin surplus every year for the last four years. Although the recent budget expects a deficit of $3.6 billion for 2025, it is based on a very conservative energy prices compared with the prevailing market prices,” said Shitole. Qatar’s budget penciled in oil price estimate at $60 per barrel for 2025, well below the current price of $72 per barrel.
Meanwhile, JP Morgan recently reclassified Qatar as developed markets from the Emerging-Markets Bond Index as its gross national income exceeded the required threshold.
“I think the Qatari government bonds in general could lag other AA rated EM bonds over the next few weeks as JP Morgan recently announced a phased removal of these bonds from its Emerging Markets sovereign bond index starting March 31,” said Shitole.
Both tranches are slightly up since the new issue mainly due to lower treasury yields. “These are AA rated bonds and likely to move in tandem with US treasury rates.”
JP Morgan, QNB Capital and Standard Chartered were the global coordinators, as well as joint lead managers along with Banco Santander, Barclays, Citigroup, Credit Agricole, Deutsche Bank, Goldman Sachs and SMBC Nikko.
(Reporting by Brinda Darasha; editing by Seban Scaria)