CORRECTED-MIDEAST DEBT-TAQA buyback shows Gulf appetite for debt management

Wed Nov 23, 2011 9:41am EST

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(Corrects TAQA rating to "A" from "AA" in second paragraph)

* Gulf issuers look at options as refunding humps approach

* Bond buybacks, exchange offers likely to appeal

* But global environment meant TAQA offered high buyback premium

* Companies need to show they have the cash for buybacks

* Lower-rated issuers may struggle to imitate TAQA

By Rachna Uppal

DUBAI, Nov 23 (Reuters) - Abu Dhabi National Energy Co's (TAQA) move to buy back $1.5 billion in bonds from investors -- at a juicy premium -- will help the company manage its debt levels at a time of increasingly expensive bank loans, but lower-rated Gulf corporates may struggle to follow a similar strategy.

A-rated TAQA, 75 percent owned by the government of Abu Dhabi, launched a tender offer this week to buy back its bonds maturing in 2012, and enlisted banks to arrange a possible new bond issue under its global programme.

"Combining a tender offer for the 2012 bonds with a new bond issue allows TAQA to refinance an upcoming liability, extend its debt maturity profile, and take advantage of the low interest rate environment which currently exists," said Chavan Bhogaita, head of the markets strategy unit at National Bank of Abu Dhabi.

"This strategy means all these things can be achieved without affecting the company's overall level of indebtedness."

Pricing of the new bonds is likely to be cheaper than the existing facility, with top-rated Gulf names attracting strong demand globally because of their risk-reward profile.

TAQA's 5.62 percent October 2012 bond was bid at 103.500 on Wednesday afternoon, having rallied after the buyback launch, which offers a cash price of 103.75 to existing bondholders.

The yield on the five-year bond has dropped about 110 basis points since the beginning of the year, according to Thomson Reuters data.

"A new issue of five-year duration will definitely go at under 4.75 percent given swap curve and TAQA spreads," said one regional fixed income trader, declining to be identified.

GETTING SQUEEZED

With global markets unstable and no clear resolution to the euro zone debt crisis in sight, companies in the Gulf, facing refinancing humps in the next few years, are being forced to consider options to keep liabilities under control and funding costs down.

The fixed income trader said the grim global environment seemed to be a factor behind the generous 3.75 percent premium which TAQA is offering on its bond buyback.

"The only reason I would do that as a company is if I see threats around my new issue being placed well...and that raises questions about the funding situation in the Middle East."

Since banks, especially in Europe, are no longer able to lend at attractive rates -- if they are able to lend at all -- issuing bonds as a refinancing tool has emerged as a preferred mechanism.

On Wednesday, International Petroleum Investment Co (IPIC) said it had repaid $3.75 billion in loans due in 2013 with the proceeds of its multi-tranche bond issued in October, pushing maturities out to 30 years.

Despite its AA rating and strategic importance to Abu Dhabi, which holds 90 percent of the United Arab Emirates' oil reserves, investors managed to extract an impressive yield from the company in return for its bumper issue.

"UAE and GCC (Gulf Cooperation Council) companies used to refinance their debt largely through European banks who have left; and if they do lend, they will lend at rates prevailing in their home countries," said Mohammed Ali Yasin, chief investment officer at CAPM Investment in Abu Dhabi.

"Looking forward, financing costs will only increase. So managing debt or refinancing their obligations on reasonable terms is the primary objective of any corporate or country in the GCC."

NO SIZE FITS ALL

Other regional issuers, sovereign as well as corporate, are increasingly focused on their debt management activities. Bahraini lender BBK and the state of Lebanon have both launched offers to exchange existing bonds into new paper.

"I would expect that as the market matures, more issuers from the region will explore liability management techniques such as tender and exchange offers as part of their broader funding strategies," NBAD's Bhogaita said.

While a buyback or exchange offer may appeal, companies will need to show they have the cash -- or can acquire it -- in order to do buybacks. And any offer to issue new paper as part of the deal will have to be paper that investors want to buy.

Dubai government entities Jebel Ali Free Zone (JAFZ) and DIFC Investments both have hefty maturities coming up in 2012, but are both trading at a significant discount to par.

Jafza's 3.401 percent 7.5 billion dirham Islamic bond, or sukuk, maturing in November 2012 was bid at about 91.240 on Wednesday, while DIFC Investments' 0.713 percent $1.25 billion sukuk due in June was bid at about 93.500.

Both are strategic government entities, but there are lingering concerns in the market about their refinancing plans.

"This is a market for high-grade issuers, not the DIFCs or the Jafzas of the world. And look at the yields. Where will they refinance?" said another fixed income trader, based in the region.

"It's all risk-off around the world." (Additional reporting by Stanley Carvalho and Mala Pancholia; Editing by Andrew Torchia)

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