New Taqa issuance dominates volatile week in credit markets

Abu Dhabi: International markets were again driven by events in the US last week. A promising rally by US financial stocks was curtailed on Thursday by poor economic data, leading to the largest drop in eight years. Disappointing results from Ericsson and an $8.9 billion loss from Wachovia also spooked the markets.

A volatile week in local credit markets was dominated by the announcement of a new benchmark issue from Abu Dhabi National Energy PJSC (Taqa). The pricing and size of the new deal, combined with a jittery tone in the markets, pushed spreads wider across a range of Gulf Cooperation Council (GCC) corporates. The HSBC/DIFX Indices ended the week four basis points wider.

Taqa deal

The Taqa deal was split into two tranches. The 2013 bond was $1 billion in size and priced 325 basis points over the five year US treasuries, whereas the 2018 bond was $500 million and priced 325 basis points over the ten year US treasuries. Both bonds were placed mostly into North American, Middle Eastern and Asian institutional clients.

The Taqa bonds were priced around 50 basis points cheaper than secondary spreads, leading the outstanding issues to widen considerably. The 2012 bonds were quoted at 260 basis points over treasuries and quickly widened out to 300 basis points. The price on credit default swaps, or the annual cost of insuring $10,000,000 against a default by Taqa, leapt from $101,000 to $140,000.

Other GCC corporates were also affected by the move wider. Bonds issued by Dubai Holding, DP World and DIFC all traded weaker on the news as clients sold down existing positions to go into the new deal.

Separately, a very positive earnings season continued last week for GCC financials. Emirates NBD reported second quarter profits up 45 per cent, UNB posted a 49 per cent gain, and NBAD reported a rise of 72 per cent. Senior bonds issued by GCC financials are in great demand by institutional clients globally.