* Etisalat's dollar, euro issue expected next week
* Could raise $2-3 billion, bankers believe
* Set to achieve tightest-ever pricing on a deal in the
* Spreads in double-digit range above mid-swaps seen
* Reflects Gulf's economic strength, rise as mainstream
By Archana Narayanan and David French
DUBAI, June 5 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.
"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
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.
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
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
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
Lead managers for the Etisalat issue are Deutsche Bank
, Goldman Sachs, HSBC and RBS.
(Editing by Andrew Torchia)