In a year of comebacks in emerging markets, Oman returned to the international bond market for the first time in nearly 20 years last week with a $2.5 billion (Dh9.18 billion) offering comprising five and 10-year notes. While the outcome was considered decent by bankers, there were a couple of aspects of the deal that raised eyebrows.
One was that the notes are likely to be eligible for inclusion in JP Morgan’s widely followed EMBI Global Diversified index, even though Oman is considered a high-income economy by the World Bank.
The multilateral institution defines any country with a gross national income per capita of $12,736 within that category — much lower than Oman’s levels.
Even so, a sovereign or quasi-sovereign can qualify for inclusion in the Global Diversified index as long as a country’s GNI per capita is below a certain threshold for three consecutive years. That threshold changes annually depending on economic variables.
If data between 2012 and 2014 were used, Oman would qualify for inclusion in the index. In 2014, for example, its GNI per capita was $18,340, while the index income ceiling was $19,708. In 2013, Oman’s GNI per capita was $19,280 compared with an index income ceiling of U$19,585.
JP Morgan has yet to make a decision on whether or not the bonds will be included as it considers data for 2015 as part of its review process.
Leads, however, are confident Oman will be included in the index, which helps boost liquidity. It meets all the criteria for eligibility, said one, who added that the likelihood of index eligibility was helpful but not a game changer for the deal.
The other issue that got bankers chatting was the pricing. With no outstanding curve, leads used feedback from the roadshow. Among other things, investors looked at where Abu Dhabi and Qatar were trading and their respective leading banks.
With Omani lender Bank Muscat having $500 million May 2021 notes outstanding, that gave some pointers for price thoughts. Those bonds were trading at a Z-spread of 253 basis points (bps), according to Eikon.
Surprisingly, Oman began marketing the five-year notes flat to wide of Muscat at mid/high 200s over mid-swaps. It marketed the 10-year tranche at mid-300s.
Guidance was set at plus 262.5bps area and plus 337.5bps area respectively, before a revision to 250bps area and 325bps area, plus or minus 5bps on both tranches.
The sovereign priced the deal at the tight end, printing a $1 billion 3.625 per cent June 2021 note tranche at 245bps over swaps and $1.5 billion of 4.75 per cent June 2026s at plus 320bps.
It’s a bit unusual for a sovereign to be flattish against its banks, said a banker away from the deal.
The lead banker said a new Muscat deal would come wide of where the outstanding bond is trading after taking into account a new issue premium. “If you look at where Muscat would come now, pricing looks acceptable,” he said.
The rival banker did acknowledge that Oman’s five-year bond was for a bigger size and that liquidity on the Muscat notes is weak in the secondary market.
He said that compared with where Abu Dhabi and Qatar printed their recent five- and 10-year bonds, Oman’s pricing appeared fine. “The relative value against other sovereigns stacks up nicely.”
Oman offered a 130bps pick-up over Abu Dhabi May 2021s in spread terms and just over 100bps over Qatar’s June 2021s. On the 10-year, Oman came 185bps back of Abu Dhabi and 130bps wide of Qatar.
And with Oman’s bonds trading around par on the break, albeit having traded down later in the week, the rival banker said that overall the bonds were well priced, notwithstanding the Bank Muscat comparison.
Oman’s deal is part of a spree of new issuance from the region and followed in the footsteps of Abu Dhabi and Qatar.
While those two sovereigns are much better rated, the one thing they and Oman have in common is the need to raise funds to support government finances in the wake of lower oil prices.
Oman, in particular, has suffered with Standard & Poor’s downgrading the sovereign by four notches since February 2015 to BBB- and Moody’s by three notches since February this year to Baa1.
Despite material adjustment, Oman’s fiscal and external break-even oil prices are forecast to remain one of the highest among countries in the Gulf Cooperation Council and Commonwealth of Independent States, according to International Monetary Fund estimates as of end-April 2016.
Therefore, a protracted period of low oil prices has a much more pronounced negative impact on Oman’s economic performance, government finances, and balance-of-payments position than it does for most other oil exporters rated by Moody’s, said the ratings agency in its last downgrade statement in May.
Moody’s added that Oman’s fiscal deficit is more than 16 per cent of GDP. It also forecast that the government’s total external debt will increase significantly, to 75 per cent of GDP by 2020 from less than 30 per cent in 2015.
Investors, however, were not just concerned with the sultanate’s economic challenges. Another issue is who will succeed the Sultan, who has no children. The Sultan, who is 75, acceded to the throne in 1970. He has not publicly named an heir.
Middle East banks were the biggest buyers of the five-year notes, while international institutional investors dominated the allocations on the 10-year tranche. The order book was $6 billion.
Citigroup, JP Morgan, MUFG, National Bank of Abu Dhabi and Natixis were the leads on the 144A/Reg S deal.