Qatars RasGas launched a spectacular $2.23bn triple tranche blowout bond on Thursday, capturing $17.5bn of orders the most for a Gulf issue in history for the biggest emerging market corporate bond of the year. Investors piled into the debt sale thanks to its capped size, the liquidity in the benchmark, the positive natural gas story and the mispricing of the issuers outstanding bonds.
Ras Laffan LNG (commonly known as RasGas), rated Aa2/A/A+, launched a $500m three year tranche at 99.946 with a 4.508% yield at 300bp over US Treasuries, a $1.15bn five year tranche at 99.768 at a 5.48% yield, or a spread of 312.5bp, and a $600m 10 year tranche at 99.696, a 6.788% yield at 325bp over US Treasuries. Leads Citi, Credit Suisse and HSBC gradually unleashed aggressive pricing guidance to a compliant global investor base, seeking exposure to the liquefied natural gas (LNG) producer.
The deal received $11bn of orders after pricing whispers on Tuesday of low to mid-300bp area for the three year, mid-300bp area for the five year and high 300bp for the 10 year paper. This allowed the leads to launch the Reg S/144a deal at the tight end of the revised guidance released on Wednesday at 325bp for the three year, 337.5bp for the five and 350bp for the 10 year format.
"RasGas is probably one of the strongest credits in the Gulf market," said Mohieddine Kronfol, managing director at Dubai-based asset management company Algebra Capital. The deal is "another example of the strong demand for high quality sovereign-backed names". Bankers on the deal say the new issue concessions over the Qatar sovereign for the three year, five year and 10 year stands at 60bp, 65bp and 58bp, respectively. The senior secured notes saw a whopping $17bn of demand from around 400 global accounts, beating the $12bn order book for the Qatar and Abu Dhabi trades this year. The demand was unprecedented: the notes were effectively over-subscribed from each region for each tranche.
The bond was distributed globally in each tranche with 300 accounts in total despite the fact the benchmark is not included in any major bond index. The three, five and 10 year tranches received $4.5bn, $7.5bn and $5.5bn of demand. On average across the three tranches, the US bought 45%, Europe bought 30%, the Middle East 15% and Asia 10%. Nevertheless, a higher proportion of Middle Eastern investors grabbed the three and five year tranches: the sweet spot for regional investors and accounting for the larger size of the five year tranche compared with the 10 year paper.
The issuer has outstanding amortising long-dated project finance bonds, which have been largely sold to buy-and-hold real money investors such as pension funds and life insurance funds. These bonds are classic long dated project finance bonds such as the $1.4bn 2020s, $750m 2016s and $850m 2027s. However, they are seen as illiquid, expensive for the issuer and trade at a premium of 100bp to 200bp to the sovereign. "We wanted to broaden the investor base and aggressively re-price, rather than re-establish RasGass yield curve," said Samad Sirohey, managing director of debt capital markets at Citi in Dubai.
The leads embarked on ambitious project to transform the project finance issuer into a high grade corporate borrower. As the company benefits from a large cashflow, the issuer opted for shorter maturities to reduce coupon payments and all-in funding costs, which could subsequently be repaid from existing cashflow. As a result, the three, five and 10 year format, the classic format for multi-tranche corporate issuance, was chosen. "The choice of bullet structures and short to intermediate maturities reflected the fact that a large portion of the investor universe doesnt get involved in long-dated amortisers," said Sirohey.
The feat paid off. "Every time we engaged investors on positioning and pricing, the market acted positively and the outstanding bonds tightened as investors re-focused on the companys profile as Qatars premier corporate borrower," said Sirohey. The deal was buoyed by a strong market tone as EMBI spreads tightened around 35bp-40bp over the past week. RasGass existing cash bonds tightened by 40bp on the existing interpolated yield curve. Bankers on the deal said the momentum generated by the global roadshow in London, Germany and the US that ended last week engineered this repricing.
In addition, a new diverse profile of real money investors sought greater exposure to the investment grade credit. RasGas is 70% owned by government-backed Qatar Petroleum and 30% by Exxon Mobil. The proceeds from the debt sale are to primarily fund the completion of the remaining work on RasGas LNG trains 6 and 7. This cash and up to $956m of new proposed shareholder loans from an affiliate of Exxon Mobil completes the $10bn financing programme launched by Ras Gas in August 2005. Since the deal was capped at $2.23bn "this gave investors a lot of comfort on deal technicals and helped generate strong momentum," said Sirohey.
"The Qatar Telecom deal offered diversification value, by contrast there are many ways to play the oil and gas theme from credits in Russia and Latin America," said Claudia Calich, a senior emerging markets portfolio manager at Invesco in New York. Nevertheless, she rushed to snap up the high grade paper since "RasGas is a good, positive credit while also benefiting from the tightening in bond spreads of the sovereign". Calich placed sizeable orders for the five and 10 year tranche but shunned the three year paper "as we prefer an upside in RasGass yield curve and this tranche was too small."
But Calich said the large participation of real money foreign investors would serve to ensure strong secondary market liquidity. Bankers agreed, pointing out that all three tranches rallied just over a point in the secondary market, just before markets closed. "RasGas has immensely strong cashflow, and a staggeringly low cost base that allows it to have positive cashflows at levels well below most other gas producers," said Andrew Dell, head of debt capital markets for the CEEMEA region at HSBC.
This trailblazing transaction that bring global demand for an aggressively priced liquid benchmark while repricing the issuers existing yield curve tighter has established a precedent for other Gulf corporate borrowers, said bankers.
"The global investor base has required a high premium for Middle East risk but by telling the positive credit story and by significantly tightening pricing guidance, this deal helped to take Qatar and the region forward," said Dell.
The deal flow in the Gulf is set to continue next week. Dolphin Energy, a natural gas company in Abu Dhabi, has tapped BNP Paribas, RBS, Abu Dhabi Commercial Bank and National Bank of Abu Dhabi to arrange a series of investor meetings for a potential Reg S/144a issue. The borrower was in Abu Dhabi yesterday, London on Friday, and travels to Los Angeles on Monday, Boston on Tuesday and New York on Wednesday.