* Sovereign fills Gulf's missing piece
* Deal gets global distribution
* Bankers expect Kuwait to build curve
By Sudip Roy
LONDON, March 16 (IFR) - Bond market debutant Kuwait
overcame growing fears about higher Treasury yields to sell the
biggest EM sovereign deal this year, marking another big step in
the Gulf region's evolution into a fully-fledged market.
Kuwait was the only Gulf sovereign - bar some of the smaller
emirates that make up the UAE - not to have issued in the
international markets. But all that changed on Monday when it
raised US$8bn through a dual-tranche offering of five and
It means that each of the region's sovereigns has an
established liquid benchmark curve. "The Gulf is a serious
market now," said one banker close to the Kuwait deal. "Everyone
has set up DMOs or departments that manage debt. The region is
allocating time, effort and people."
The one missing piece, he said, is the presence of
A trader said the Gulf market has transformed itself over
the past couple of years. "It's remarkable to think that the GCC
is a full-time job now given where it was 12-18 months ago," he
While Kuwait (AA/AA) lacked the wow factor of Saudi Arabia's
record breaking US$17.5bn deal in October, it achieved similar
results - size, tight pricing and global distribution - and
further consolidated the Gulf's standing in the international
European investors took 46% of the five-year, while US funds
bought 51% of the 10-year. In contrast, MENA accounts got only
26% of each bond. Fund managers dominated both tranches.
The deal was supported by anchor orders from some of the big
guns in the investment community. Demand peaked at US$29bn
including lead interest, before the book was reconciled at
US$27bn. Kuwait could have raised up to US$9.5bn, but chose not
to hit its limit and prioritised pricing instead.
Investors, especially those with investment-grade
portfolios, were enticed by the yields on offer for such a
The US$3.5bn 2.75% March 2022s priced at a yield of 2.887%
or 75bp over Treasuries as leads tightened by 25bp from initial
The US$4.5bn 3.5% March 2027s printed at 3.617% or 100bp
over Treasuries, 20bp inside where pricing began.
At those spreads, the bonds came at or around fair value
based on the trading levels of the nearest comps, Abu Dhabi and
Qatar, which are similarly rated.
Abu Dhabi May 2021s were quoted at a G-spread of 69bp by a
banker away from the deal, while its May 2026s were at plus
89bp. Meanwhile, Qatar June 2021s were at plus 91bp and its June
2026s at plus 104bp.
"The five-year 5bp back of Abu Dhabi secondaries so
arguably inside a new one. The 10-year is a bit cheaper with Abu
Dhabi at 89bp," said the banker.
RIGHT AMOUNT, RIGHT HANDS
Leo Hu, senior portfolio manager at NN Investment Partners,
who bought the bonds, thought the deal was well priced.
"As a first time issuer, they didn't want to leave too much
on the table, but they also didn't want to destroy the deal.
It's a courtesy to leave something but not too much. So from
that perspective it did well, trading up in the secondary, but
not crazily performing.
"The credit is very strong - people are not going to get
fired because they are buying Kuwait. It's perhaps a less
eye-catching story than Saudi because it's a smaller size, but
US$8bn was the right amount, and the bonds were placed into the
right hands," he said.
For others, though, the pricing proved too much. "We dropped
out after guidance tightening as we thought it was around and
through fair value," said Patty Cao, research analyst at
Aberdeen Asset Management.
Another EM investor also hoped for more attractive pricing.
"It would have been a good deal if the bonds had priced at
initial price thoughts, but as expected, strong market
conditions pushed spreads tighter. That said, we still
participated in the deal," said the fund manager in London.
Kuwait pushed pricing as tight as possible despite coming
amid a healthy sell-off in Treasuries and oil. In the time
between the mandate announcement on March 1 and the pricing
date, 10-year Treasury yields had jumped around 20bp, making the
backdrop much trickier for borrowers.
Oil prices, too, were on the back foot with Brent futures
falling about US$6 over the same period.
BEST KEPT SECRET
Kuwait, though, has the lowest breakeven oil price in the
region. And while government finances are not as strong as they
once were - in net terms the annual budget was in deficit by
KD6bn (US$19.6bn) at the end of the last fiscal year - the
economy is in good shape. General government debt-to-GDP, for
example, is less than 20%.
"Kuwait is the GCC's best kept secret," said the lead
The bonds tightened in the secondary with the five-year bid
at 67bp over Treasuries and the 10-year at 95bp over, according
to MarketAxess prices.
Bankers say Kuwait will seek to build its curve with future
transactions. A draft law to allow issuance of up to 30-years is
in process and needs to be passed by the National Assembly.
Citigroup, JP Morgan and HSBC were global coordinators. They
were joined on the books by Deutsche Bank, NBK Capital and
(Reporting by Sudip Roy; additional reporting by Robert Hogg;
editing by Julian Baker)