Markets

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Abu Dhabi looks like it missed the boat. Its $10 billion bond issue has landed after U.S. 10-year Treasury yields have risen 30 basis points over the past month. 

But from the issuer's point of view, a failure to time the exact low in benchmark borrowing costs is just taking the rough with the smooth. More importantly it makes the statement that it can issue at will, showing it has taken the final step to becoming a vanilla credit that investors will buy automatically.

Benchmark Rising
Turns out the prime time for issuing new dollar bonds was in early September
Source: Bloomberg

All the other components have fallen neatly into place. It's able to issue twice the amount that it did last year, and introduce a 30-year maturity for the first time. Jordan, with a B1 rating, came on Monday with a $1 billion 7.5 percent 30-year deal, and the spread has already tightened 50 basis points. If lesser credits can come in such long-dated maturities, it's a good time for Abu Dhabi to issue. 

After last week's $12.5 billion sale from Saudi Arabia, Abu Dhabi scheduled its funding hard on its heels, as it did last year. Both have support from rising oil prices and tightening credit spreads. Both are still relatively rare issuers, and investors are significantly underweight the region. Abu Dhabi is rated two notches higher and has a more diversified economy than the region's bellwether, so it stands to reason that its spreads should come tighter. 

Abu Dhabi Borrowing Costs
Tightening credit spreads have more than compensated for rising underlying rates
Source: Bloomberg

In the weird world of bond indexes, the more debt you issue the more investors have to buy it. Fund managers are driven to try and outperform the index and a juicy new issue premium is one sure way of augmenting returns. And there's been a scarcity of highly liquid new issues -- there has been little large-scale merger and acquisition activity this year to throw up bumper bond deals, with fat premiums, for investors to gorge on.

Final price talk has landed on U.S. Treasuries plus 70 basis points for the 5-year tranche, rising to 90 basis points for the 10-year and 130 basis points for the 30-year. Even though these are about 15 basis points tighter than was first suggested, this is still a juicy premium for an AA rated deal in a super-liquid size.

Abu Dhabi Credit World
Spreads have tightened considerably since the May 2016 deals came but the issuer is still dangling a tempting new issue premium for investors.
Source: Bloomberg
Note: Spreads over benchmark U.S. Treasury at time of issuance. Final new issue spreads still subject to +/- 5 basis points discretion. Maturities on new 5 and 10-year deals will be 18 months longer than 2016 issuance.

As Abu Dhabi issues more bonds in future, the need for such a fat premium will fade. For now, it reflects a fair recognition of political risk in the Middle East and the fact that, newfound vanilla status aside, it's still a relatively new name. 

--Bloomberg's Elaine He helped with charts

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net