Kuwait arrives fashionably late to GCC bond party; investors benchmark against Abu Dhabi—deal preview

by Hassan Jivraj , and Laura Gardner Cuesta

The Government of Kuwait’s debut five-and-10-year Eurobond will likely be well received by the market, benefiting from a solid investment grade rating and scarcity value, according to market participants. While most investors were in agreement that Kuwait will price somewhere between the Abu Dhabi and Saudi Arabia curve, there is hope that the sovereign will concede a little juice as a first-time issuer.

“It’s [Kuwait] a great credit in terms of rating. Combined with the lack of supply and [the fact] it’s a first-time issue, it will excite investors,” a UAE-based banker said. Kuwait will wrap up its roadshow for the deal tomorrow (10 March).

Price thoughts

On the whole, investors agreed that Abu Dhabi is the nearest comparable, and Kuwait should price somewhere between Abu Dhabi and Saudi Arabia, though some queried whether Kuwait will be sufficiently generous in the current low-yield environment.

Two Kuwait-based investment bankers suggested the five-year tranche could even price inside Abu Dhabi. One suggested a yield of 2.2%, and the second saying the deal could come even tighter, due to the quality of Kuwait’s credit rating and the lack of supply from similar comparables.

Abu Dhabi 2.125% 2021s are quoted at 99 to yield 2.40%, or a spread of 35bps. Abu Dhabi 3.125% 2026s are quoted at 98.5 to yield 3.31%, or a spread of 86bps. Saudi Arabia 2.375% 2021s are quoted at 97.625 cash price to yield 2.93%, or a spread of 82bps. The Kingdom’s 3.25% 2026s are quoted at 95.625 to yield 3.80%, equating to a spread of 133bps.

“My personal view is that they will not offer much juice, especially on the five-year, and will try to price it as tight as they can,” said a Beirut-based portfolio manager, who expects a five-year note to price around 2.375%.

“Kuwait is in a much better shape fiscally than other GCC countries and this is an issuance by the government as opposed to Abu Dhabi, which is an Emirate and not a country issuing. I think that deserves a few basis points in their favour. Furthermore, they might not need to come back to the market soon so, no need to incentivise investors that much.”

However, one London-based EM sovereign PM said that 2.2% for the five-year was pretty tight in his opinion and being a first-time issue and the geography of the Kuwait, he expected a bit more.

Other investors in the GCC were in line with the London-based portfolio manager’s price thoughts, and agreeing that Abu Dhabi is a good credit comparison.

“If I compare to Abu Dhabi’s 2021s, these notes are yielding between 2.44%-2.46%. Therefore the suggestion of 2.2% for Kuwait’s debut five-year issue is too tight for me,”a UAE-based fixed income investor said. “They should offer investors a bit of juice as it’s a first issue, so somewhere around 2.5% is fair,” he added.

A second UAE-based portfolio manager said that the 2.3%-2.4% on offer from Abu Dhabi’s 2021s would be the absolute tightest Kuwait could hope to achieve. But, he said, this would be incredibly aggressive given it’s a year shorter than Kuwait and Kuwait would have to pay a first-time issuer premium. He added that the higher end would be around Saudi Arabia’s 2.9% but a fairer starting point would be around Qatar’s 2.7%. He saw it tightening to between Abu Dhabi and Qatar.

For the 10-year there is more agreement among investors. Both Kuwaiti investment bankers said that Kuwait expect the 10-year notes at around 3.5%.

Three UAE-based PMs, the Beirut and the London PM all agreed, saying that 3.5%—or above—for the 10-year is a fair price. “For the 10-year, 3.5%-3.625% is fair. The 10-year would be an interesting play for us above 3.5%,” the Beirut-based PM said. The London-based PM said that 3.5% for the 10-year was around Qatar, and if they priced wide of that he’d be “very surprised”.

Qatar’s 2.375% 2021s were trading at 98.75 cash price, for a yield of 2.67% and a spread of 62bps. Qatar’s 3.25% 2026s were seen at 98.25 for a 3.48% yield, equating to a 103bps spread.

The first Kuwait-based investment banker even suggested that Singapore might be a good comparable due to the similar rating. But a third UAE-based portfolio manager said that comparison doesn’t work at all: “Singapore is a massively open economy and issues in its own currency, which it uses as a policy tool.”

Economy

Whilst Kuwait is in a slightly better financial position than other GCC states, the economy is significantly affected by international oil prices, a number of market participants said.

The oil sector accounted for 52.4% of Kuwait’s real gross domestic product (GDP) in 2015. The oil sector continues to be the main contributor to Kuwait’s annual revenues, accounting for 88.6% of total revenues for the fiscal year ended 31 March 2016.

“The economy grew at 2.5% in 2016 (1.1% in 2015) and is expected to edge up slightly to 2.6% in 2017, supported by an increase in public investment and domestic demand,” said Dr Florence Eid-Oakden, chief economist at Arabia Monitor.

“In 2016, due to weaker oil prices, Kuwait saw its first fiscal deficit (USD 31.7bn; 29% of GDP), after 16 years of surpluses,” she added.

“The government launched ‘New Kuwait 2035’ through 164 strategic development programmes. The objectives of this plan are consistent with other regional development plans, such as Saudi’s Vision 2030. The plan features seven pillars, which will pursue diversification and growth,” said Arabia Monitor’s Eid-Oakden.

Commenting on funding needs, Dr Eid-Oakden explained: “Kuwait will need USD 26bn (20% of GDP) of funding in 2017, after transfers to the Future Generations Fund, part of Kuwait’s sovereign wealth fund, the Kuwait Investment Authority (KIA). We expect continuity in the way the funds will be broadly managed.

“KIA now manages assets estimated at USD 592bn by the Sovereign Wealth Fund Institute, with holdings in the General Reserve Fund estimated at around USD 80bn-USD 100bn (from around USD 60bn in 2013),” she said.

However, investors still need more convincing on the plans. “Kuwait has the same problems as every other GCC issuer (outside of Dubai): an unhealthily large reliance on oil and no executable plan to diversify. The question one always asks is are these things temporary liquidity management tools or is there some larger aim for it,” the third UAE-based PM said.

Geopolitics and domestic politics

In addition to oil and economics, some market participants also say there is some political risk. “The geopolitical risk in Kuwait is higher than other GCC countries. Kuwait is a bit closer to the action (eg. Iraq, Iran and others), in addition to domestic politics,” said the first UAE-based fixed income investor.

The country’s political scene has rapidly changed over the past few months, with the Emir of Kuwait, Sheikh Sabah Al Ahmad Al Sabah, dissolving the parliament on 16 October due to tensions between MPs and the government over increased fuel prices. New parliamentary elections took place on 26 November and a new government was formed in December 2016.

“Unlike other GCC members, Kuwaiti politics are more contested and recent parliamentary elections have ushered in a number of new MPs who are less amenable to the economic reform agenda, particularly in the reduction of subsidies, and many who are aligned with a more populist opposition movement, some with an Islamist affiliation. These electoral politics could make financial governance and reform more complicated,” explained Karen E Young, senior resident scholar at the Arab Gulf States Institute in Washington.

Kuwait had originally planned to tap the international debt markets in October 2016, but decided to move aside for its larger Gulf Arab neighbour, Saudi Arabia. The kingdom sold a jumbo triple-tranche bond totalling USD 17.5bn in October.

“The delay in going to bond markets could be seen as letting some time pass since the November 2016 elections and for the government to build consensus for its reforms,” said Young.

Long tenor and sukuk on the cards?

Kuwait sent a request for proposals in November to raise KWD 3bn-equivalent (USD 9.9bn) in bonds via a triple-tranche placement of five-, 10- and 30-year maturities, as reported by Debtwire, citing sources familiar with the situation.

However, due to the country’s legal framework it is currently unable to issue 30-year debt. A recent IMF report said that a draft law enabling the government to sell bond maturities of up to 30 years is being discussed.

The GCC state’s 2017 budget, however, assumes oil prices in the USD 40/bbl-45/bbl range. The recent surge in the commodity’s value means the Ministry of Finance may decide to issue less than the previously reported USD 10bn figure.

In addition Kuwait also plans to sell sukuk, as Debtwire reported, citing sources familiar with the transaction. However, the same IMF report noted that sukuk is still hindered by legal issues. The first Kuwaiti investment banker said that it will take some time and may not arrive to the market until September.

The GCC state began its western marketing tour for the conventional issuance in London earlier this week. Local media reported that the sovereign would hold an Asian roadshow in mid-February, followed by European and US legs.

Citi, HSBC and JPMorgan are Global Coordinators on the deal, joined by Deutsche Bank, NBK Capital and Standard Chartered as joint lead managers

Debtwire revealed Kuwait’s Eurobond plans in February 2016.

Kuwait is rated AA by S&P Global Ratings, Aa2 by Moody’s and AA by Fitch.

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