Qatar has received strong investor demand for its planned dual-tranche Islamic bond, or sukuk, fuelled by the state’s initial price guidance, bankers said yesterday.

Aggregate firm orders have topped $ 7.5bn, split roughly equally between the two tranches, one banker said.

Qatar earlier yesterday said initial profit guidance for the five-year tranche was around 135 basis points over midswaps, while for the 10-year tranche it was in the area of 175 basis points over midswaps.

This equates to a profit rate of about 2.22% for the long five-year tranche maturing in January 2018 and about 3.4% for the long 10-year paper maturing in January 2023.

The initial pricing guidance is wider than some in the market had expected, given heavy global demand for high-grade Gulf paper and strong demand for sukuk among idle Islamic investment funds.

Qatar may be aiming to maximise orders for the sukuk, which would allow it to make large allocations to global investors and particularly Islamic investors in Southeast Asia.
This year’s largest dollar sukuk issue so far is Saudi Electricity Company’s $ 1.75bn deal in late March, which Qatar looks able to exceed easily if it chooses.

Several market sources said they expected Qatar’s pricing guidance to tighten before launch.

“They (Qatar) will tighten at least 10 bps ...What they are doing is showing generous guidance to get the orders in,” said a fixed income trader at a regional bank.

“Then they will tighten and print big,” he said, predicting Qatar would issue between $ 2bn and $ 3bn.

Biswajit Dasgupta, head of treasury and trading at Invest AD, said: “We expect that they’ll look to build a really large order book and then tighten the pricing. The market sense is that final pricing will be more or less in line with the current curve for the 2017 maturity, with the sukuk premium making up for this issue’s longer duration.

“We think Qatari banks will be the biggest bidders, although the combination of a high credit rating and the sukuk structure will probably receive decent demand from some Islamic investors out of Asia.”

“Given that investors traditionally pay a premium to own a sukuk, I believe that there is room for this paper to tighten,” said Ahmed Shehada, head of trading at Qatar National Bank Financial Services. “In the midst of all the (global) turmoil, Qatar seems to have been met with open arms.”

“The indicated pricing is attractive compared with its existing conventional yield curve, but that was expected,” said another banker.

Demand for sukuk, or debt that complies with Islamic laws, has driven sales in the Gulf to $ 12.9bn this year from $ 2.6bn in the same period last year, data compiled by Bloomberg show.

The sukuk will have an ijara structure, a rental or lease arrangement, according to the prospectus. In a common form of ijara, the originator sells assets to a special-purpose vehicle which issues sukuk certificates to obtain funding to pay for the assets.

Qatar will use state-owned buildings and land as underlying assets for the sale of Islamic bonds, Standard & Poor’s Ratings Services said on Monday, while assigning “AA” rating on the proposed sukuk.

Qatar has been among the world’s fastest-growing economies in recent years, driven by the development of the country’s hydrocarbon resources, in particular its natural gas reserves, which are the world’s third-largest after Russia and Iran.

The state had tapped the debt market late last year with a $ 5bn three-tranche bond issue, pricing its 5-year tranche to yield 3.184% at the time and the 10-year tranche to yield 4.630%.

Demand for its debt was substantial even then, helping the world’s largest exporter of liquefied natural gas, which racked up growth of nearly 20% in 2011, to create a competitive yield curve by deepening its capital markets.

Qatar’s planned issue comes at a time when several Gulf entities are looking to tap the debt market as global risk sentiment improves. Bahrain issued a $ 1.5bn bond late last month.

Barwa Bank, Deutsche Bank, HSBC, QInvest and Standard Chartered Bank are book-runners for Qatar’s planned sukuk, which is expected to be issued this week.