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Abu Dhabi’s IPIC could reopen Gulf bond market

Abu Dhabi’s IPIC could reopen Gulf bond market

IPIC roadshows ended this week; May want to use shrinking window for issuance this year; Hope for euro zone crisis could facilitate this; Company's 2020 bonds have been performing well; But may not be willing to pay risk premium on Gulf bonds

October 29, 2011 6:19 by

Abu Dhabi’s International Petroleum Investment Co (IPIC) will weigh up whether to issue a new bond after concluding a roadshow in the United States on Wednesday this week, aware of a shrinking window of opportunity to sell debt this year.

Any issue from the AA-rated borrower could not only help the state investment vehicle round out its debt maturity profile — it might also reopen the international debt market for Gulf issuers, after a three-month drought caused by unstable markets globally.

A summit of European leaders on Wednesday did not deliver a comprehensive, detailed plan to solve the euro zone debt crisis. But a rally in riskier global assets on Thursday suggests enough progress was made — French President Nicolas Sarkozy said the region’s rescue fund will be leveraged four or five times, and that bankers had agreed private sector investors would accept the loss of half the value of their Greek bond holdings — for markets to be receptive to an IPIC issue.

Investors and traders say there is no doubt that a quasi-sovereign credit from Abu Dhabi would meet strong demand — the wealthy emirate holds 90 percent of the United Arab Emirates’ oil reserves.

“Recently, GCC spreads and Dubai CDS in particular have rallied significantly, which may potentially give a window for issuing, assuming that the European sovereign crisis does not worsen in coming weeks,” said Ahmed Talhaoui, head of asset management at Royal Capital in Abu Dhabi.

“It is a government-related name so it obviously has a higher chance of triggering appetite. Note also that IPIC’s roadshow is with foreign investors only.”

IPIC, which has an unlimited Global Medium Term Notes programme, last tapped international bond markets with a $4 billion-equivalent, three-tranche euro- and sterling-denominated issue in March, believed to be for its investment in Spain’s Cepsa

Market sources said IPIC was unlikely to be meeting US investors for a short-dated issue and would prefer to term out its yield curve, conceivably with a maturity as long as 30 years. Two sources said market talk centred on a dual-tranche dollar offering.

Since the latest series of roadshows began in Germany on October 19, the secondary market yield on IPIC’S $1.5 billion 5 percent bond maturing 2020 initially rose about 5 basis points but then came back down by the same amount to stand at 4.79 percent bid on Wednesday, or 101.50 in price.

Traders say there has been healthy appetite for the bond.

IPIC met investors in London in June but insisted at the time it was not in the market for a bond, and would only undertake a capital markets transaction in coordination with Abu Dhabi’s Debt Management Office.

The company has been an active borrower of short-term bank finance this year and the prospect of upcoming refinancing in 2012 could be a determining factor to tap credit markets. In June, it launched a $1.5 billion, 18-month bridge financing facility, and, in September, it borrowed 7.3 billion dirhams ($2 billion) to lend to its subsidiary Aabar Investments. That loan is thought to have a one-year maturity.


Other possible issuers in Abu Dhabi would welcome a bond sale by IPIC at this stage. Several potential borrowers from Abu Dhabi have had to hold off because of market volatility, including government-owned Dolphin Energy, Tourism Development and Investment Co, and more recently, Union National Bank.

“We would want IPIC to print — it provides the benchmark,” said one executive at an Abu Dhabi-based bank which is eyeing potential issuance.

And IPIC knows the window to print a deal this year is shrinking. At this time of the year, some investors will want to hold off on new investments until next year. Others, however, will be willing to park their cash in a name offering low risk and relatively high yield, and traders said IPIC and other Abu Dhabi names would fit the bill.

It is unclear whether IPIC would be willing to pay the significant risk premium which the market is still seeking on Gulf bonds; the spread between its 2020 bonds and 10-year US Treasuries has narrowed from 320 bps at the start of October to 252 bps at present, but is still some way from the range of roughly 160-230 bps which prevailed for most of the first three quarters of this year.

Brent crude oil prices are well above $100 a barrel, Abu Dhabi predicts solid growth next year, and there is no sign of major fiscal strain; affirming Abu Dhabi’s ratings in September, Fitch estimated Abu Dhabi’s overall fiscal position last year, including ADNOC dividends and ADIA investment income, was close to balance, and forecast a surplus this year of a double-digit percentage of gross domestic product.

In these conditions, IPIC may feel the significant risk premium which the market is still attaching to its bonds is too high.

On the other hand, with US Treasury yields showing technical signs of having formed at least a medium-term bottom in September and early October, and the prospect of further rises if Europe does succeed in muddling through its debt crisis response, the opportunity to lock in dollar funding at current yields may appeal to the company.

”Investor sentiment is the only problem here. Rates are low, there is no doubt that it’s the best time to come to the market. Plus, this market is waiting for a strong name to issue, and the rest will follow,” said one UAE fixed income trader.

IPIC, which also has a stake in Austrian oil group OMV , posted a $424 million gain on financial instruments in the first half of 2011, compared with a loss of $1.1 billion for the year-ago period. That boosted profit after tax to $1.16 billion from $413 million a year ago. (Editing by Andrew Torchia)

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