Abu Dhabi's first bond issue in almost two years has been well received by international lenders, raising US$3 billion (Dh11.01bn). The success shows that cautious global lenders are willing to provide funds to highly rated governments in the region, according to bankers. The debt offering, issued in one of the tightest credit markets in decades, was oversubscribed more than two times as investors offered to buy about $7bn of the bonds. The emirate limited the amount it borrowed to the $3bn. The issue will be split in two, with one five-year tranche of $1.5bn, and a second tranche of $1.5bn with a tenure of 10 years. They would be priced at 400 and 420 basis points (or hundredths of 1 per cent) over US treasuries respectively, one banker said. The emirate had not decided on how the money would be used, although much of it would be for general budget expenditures, government officials have said. "This is really positive for the bond market and the bonds to come. It shows that high-quality credit can once again get international attention and once Bahrain and Qatar will follow suit, that will add even more transparency," said another banker. The offer is part of a larger plan by the Abu Dhabi Government to issue about $10bn in bonds. It comes as a first test of investor sentiment after the new-issue pipeline has been practically closed during the past 12 to 18 months. Abu Dhabi wants to establish a bond market with a functioning yield curve, which will make it easier for other emirates and companies to issue their own debt. The bond will also make it easier to press ahead with $200bn to $300bn worth of infrastructure projects planned for the next five years, analysts say. Abu Dhabi plans to triple its population by 2030, diversify its industry and become a leading cultural destination. "The point is to develop capital markets and in that regard, it could have far more benefits as a benchmark for lending in the emirate," said Robert McKinnon, the head of research at Al Mal Capital. "The point is to create a benchmark for lending rather than raise capital needed; they want the bonds to be actively traded." Other countries are expected follow suit shortly. Bahrain has announced the issue of a $500 million sukuk, or Islamic bond. Bloomberg reported yesterday that Qatar planned to sell $2bn of bonds in tenures of five and 10 years, quoting a banker. The five-year paper may be priced at 350 basis points above comparable US treasuries, while the 10-year bond may pay 400 basis points over similar benchmarks, although the transaction has not been completed. Both Abu Dhabi and Qatar are rated "Aa2" by Moody's, the highest sovereign rating in the region. Reviewing the bond issue, Moody's said Abu Dhabi's high issuer rating was supported by its "exceptionally strong balance sheet, extensive hydrocarbon resources, a very high level of GDP per capita, and stable domestic politics". Fitch said Abu Dhabi's maximum issuance under way would be about 10 per cent of its forecast GDP for this year. "Abu Dhabi would remain one of the strongest net external creditors rated by Fitch," it said. Capital market experts said Abu Dhabi may have had to pay a little more for this first issue, but prices would soon find their equilibrium and successive issues may become cheaper. In a first such sign, the spread in Abu Dhabi's outstanding $1bn bond due in 2012 has already widened in recent days, which means that the bond has become cheaper for investors. "It is extremely cheap [for investors] because it is coming at a higher spread than other countries such as Greece and Italy which have similar ratings, whereas Abu Dhabi has oil and gas reserves and is one of the safest sovereign entities," said Mahdi Mattar, the head of research and chief economist at Shuaa Capital in Dubai. "Abu Dhabi is paying too much, but they are doing that to jump-start the bond market and create liquidity." uharnischfeger@thenational.ae shamdan@thenational.ae
