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The problem with sovereign spreads and corporate reform

The problem with sovereign spreads and corporate reform

This year, Bahrain, Qatar and Dubai issued sovereign bonds, and all paid hefty premiums demanded by investors because of the turmoil in global financial markets. Even AA-rated Qatar paid a new-issue premium of about 40 basis points on the five-year tranche of its $5 billion mega bond in November.

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December 28, 2011 2:05 by



By contrast, AA-rated International Petroleum Investment Co (IPIC), a state-owned Abu Dhabi investment fund, had to pay through the nose when it reopened Gulf bond markets in October with a bumper three-tranche, $3.75 billion issue. The $1.5 billion, 5.5 percent 10-year tranche was at 5.6 percent this week, roughly flat from the time of issue.

Abu Dhabi National Energy Co also paid a premium for its $1.5 billion deal in early December, of around 25-35 bps for the five-year portion and 20-30 bps for the 10-year tranche.

Some believe new sovereign issuance could help lower financing costs for a wide range of companies, effectively setting a new benchmark for corporate fund-raising.

“Government bonds should help set new benchmarks,” said one regional fixed income trader. “Qatar sovereign would surely be able to raise money at lesser cost than say Qatar National Bank or Rasgas.”

RISK

But such a strategy of centrally financing companies’ debts would carry risks. Increasing government bond issuance could weigh on sovereign pricings, and by shielding companies from direct pressure in the capital markets, it might set back efforts to make company managements more efficient and accountable.

“This puts too much responsibility on the sovereign,” the trader said, adding that governments should incentivise companies to improve their financial management and performance rather than giving them a safety net.

Martin Kohlhase, analyst at Moody’s rating agency in Dubai, said: “Corporates tapping the market individually rather than centrally help to increase transparency, promote accountability, and ensure the efficient use of capital when the price of debt is adequately reflecting the associated risks of the underlying credit.

“Central funding would hamper these efforts and might result in an increase of interest rates of the fund-raising entity depending on its capacity to raise debt.”



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