JANUARY 11, 2018 | 9:12AM EST | DUBAI
* $6.5 billion issue follows credit rating downgrades
* Last week’s 2018 state budget did not cut deficit
* But oil price rise means Oman may undershoot deficit target
* Oman has now covered vast majority of projected deficit
* Investors still chasing EM yields despite higher US yields
The Omani government has sold a $6.5 billion bond, its largest ever, in a sign of how rising oil prices are increasing investor confidence in the Gulf’s energy exporting countries.
Oman is one of the financially weakest states in the Gulf and last month Fitch cut its rating of Oman’s debt to just above junk territory; Standard & Poor’s already rates Omani debt as junk. Last week, the government released a 2018 state budget that does little to cut a huge deficit.
But the debt sale late on Wednesday attracted a whopping $15 billion of orders, helped by this week’s leap of the Brent crude oil price to around $69 from around $50 in late July.
“The higher and more stable oil prices definitely helped the issue” despite the fact that Oman is a deteriorating credit, said Zeina Rizk, director of fixed income asset management at Dubai’s Arqaam Capital.
The Omani issue may set the tone for other regional sovereigns which are expected to borrow internationally in the first half of this year, including Saudi Arabia and Qatar.
Bonds from many other Gulf countries have outperformed U.S. Treasuries so far this year because of climbing oil prices. The yield on Saudi Arabia’s 10-year notes issued in 2016 has risen two basis points since the beginning of 2018, against a jump of 12 bps for the 10-year U.S. Treasury .
Oman sold a triple-tranche bond with maturities of five, 10 and 30 years. The longest tranche attracted the largest interest - and offered the highest margins - in a sign that international accounts looking for long-term, high-yielding assets continue to chase emerging market debt, despite rising in U.S. yields.
Oman raised $1.25 billion with the five-year tranche, $2.5 billion with the 10-year and $2.75 billion with the 30-year. The $6.5 billion sale means Oman has already covered the vast majority of the three billion rial ($7.8 billion) deficit projected in its 2018 state budget.
The budget plan said 500 million rials of the deficit would be covered by withdrawals from financial reserves, so Oman may not borrow any more in 2018, internationally or domestically - although investors think another issue is possible if market conditions are extremely favourable.
The 2018 budget assumed an average oil price of $50 per barrel. Should oil prices remain close to $70, Oman’s deficit for 2018 could be considerably lower than expected, although it would still be substantial; analysts estimate Oman’s break-even oil price at around $80.
“The markets have become familiar with the credit, people know their deficit. No-one expected them to issue less than $5 billion,” said a Dubai-based portfolio manager.
Oman issued its first triple-tranche bond last year, raising a total of $5 billion in five-, 10- and 30-year notes.
This year’s debt sale offered attractive margins to investors at the long end of the curve, with the 10- and 30-year notes featuring premiums of 30 to 40 basis points against the existing bonds maturing in 2027 and 2047.
The new bonds rose in secondary market trade on Thursday, with Asian investors buying at the long end. “I think we will see more moves once the U.S. comes in given that it looks like most of the 30 years was allocated there,” said Rizk. (Editing by Andrew Torchia, Editing by William Maclean)
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