Etisalat bond may set record for tight pricing

An impending bond issue by Abu Dhabi-based telecommunications firm Etisalat may not only be the region’s largest deal so far this year, but also set a record for tight pricing as the Gulf becomes more of a mainstream investment destination.

Etisalat’s debut bond will replace some of the debt used to fund its 4.2 billion euro ($5.7 billion) purchase of a majority stake in Morocco’s Maroc Telecom from France’s Vivendi .

Investor roadshows are due to finish on June 10 and banking sources told Reuters earlier this week that the firm could then issue a four-tranche deal, consisting of five- and 10-year bonds denominated in U.S. dollars and seven- and 12-year bonds denominated in euros.

The size has not been fixed but some bankers speculate that it will be between $2 billion and $3 billion – a level that would be easily absorbed by massive investor demand. The largest deal from the Gulf so far in 2014 was Saudi Electricity Co’s $2.5 billion, two-part sukuk in April.-Reuters

“This is the type of credit that bondholders love to hold – highly rated, established track record with scope for further growth, excellent cash flow visibility and decent transparency,” said Chavan Bhogaita, executive director at National Bank of Abu Dhabi. The bank is a passive bookrunner on the trade.

“Add the benefits of government ownership and rarity value, and you have a deal that’s firmly on the radar screens of investors.”

Beyond the factors specific to Etisalat, major trends are working in favour of the issue. Political turmoil in other emerging markets, such as Ukraine and Thailand, has left investors searching for attractive alternatives.

Meanwhile, the Gulf’s strong economic performance during the global instability of the past few years is helping to establish it for the first time as a mainstream investment destination for global funds – a trend underlined on the equities side last month by index compiler MSCI’s upgrade of the United Arab Emirates and Qatar to emerging market status.

Five-year Abu Dhabi credit default swaps, which insure its sovereign debt against non-payment, traded at 43.35 basis points on June 3, through the previous low of 45 bps seen in May 2008, Thomson Reuters data showed. The CDS have tightened 41 percent in the last 12 months.

At the same time, debt issuance by companies in the Gulf has decreased in recent months as strong economies have made it easy for firms to reduce leverage and borrow from banks.

So high demand is fighting against low supply, pushing credit spreads down. This could mean Etisalat, one of the most highly rated telecommunications firms in the world with ratings of Aa3/AA-/A+ from the main agencies, prices portions of its bond at under 100 basis points above mid-swaps – a first for any debt issue from the Gulf, including sovereign issues.

The European Central Bank’s decision to cut its deposit rate below zero on Thursday, in order to weaken the euro and discourage investors from hoarding cash, is also conducive for the Etisalat bond.

“Negative deposit rates in Europe will push investors to snap up a credit like Etisalat. Traders can leave the currency unhedged without a worry and make strong bucks from this buy,” a senior banker with a foreign institution said.

PRICING

The bullish mood in the Gulf’s bond market can be seen in Abu Dhabi state fund Mubadala Development Co, which issued a $750 million, eight-year bond in April at a spread of 120 bps over seven-year U.S. Treasuries. The bond was trading at 74 bps over its Z-spread on Tuesday.

This points to Etisalat pricing at a spread in the double digits above mid-swaps even for the longer tenures. Such a result would surpass the 115 bps over midswaps achieved by the Qatar sovereign with its five-year sukuk in July 2012, and the 10-year trade from Abu Dhabi National Energy Co in April this year at the same figure.

“I would expect the Etisalat issue to be very well bid and to price in line or even tighter than some of the highly rated Abu Dhabi government-related entities, most likely coming in around the 2.25-2.5 percent range for a five-year issue, and around 3.5-3.75 percent for a 10-year issue,” said Yaser Abushaban, executive director of asset management at Emirates Investment Bank.

Such yields would be roughly equivalent to spreads of 70 and 100 bps above current mid-swaps. One possible comparison for Etisalat, Qatari telecommunications firm Ooredoo, has a 2019 bond trading at 84 bps over Z-spread.

Despite the optimistic mood in the region, the “Gulf premium” – a premium over developed markets which issuers must pay, attributed to the region’s geopolitical tensions and its relatively primitive markets – has not entirely disappeared. Etisalat’s status as a debut issuer will also weigh on pricing a little.

So the company is expected to pay more to raise money than some lower-rated telecommunications firms from outside the region which could serve as benchmarks.

U.S. operator AT&T, rated A3 by Moody’s, had a 2019 maturity spotted at 54 bps over Z-spread on Wednesday. Mexico’s America Movil had an October 2019 maturity at 74 bps over Z-spread on Tuesday, while France’s Orange had a 1.25 billion euro bond, due January 2021, at 66 bps over on Thursday.

Lead managers for the Etisalat issue are Deutsche Bank , Goldman Sachs, HSBC and RBS.