* Qatar's first sovereign sukuk in nine years
* Plans 5- and 10-year tranches
* Price talk at MS+135 bps for 5-yr, MS+175 bps for 10-yr
* Size not yet set, but demand seen very high
* Outstanding conventional bonds tighter since issue
By Rachna Uppal and Mala Pancholia
DUBAI, July 10 Qatar is returning to the
international Islamic bond market this week after an absence of
nearly a decade, and initial price talk indicates it is leaving
enough on the table to entice a huge investor pool - and
possibly print the Gulf's largest dollar-denominated sukuk this
The Gulf Arab state plans to issue a two-tranche sukuk, with
early price talk in the area of 135 basis points over midswaps
for the five-year portion and 175 bps over for 10-year paper.
This equates to a profit rate of about 2.22 percent for the
long five-year tranche maturing in January 2018 and about 3.4
percent 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
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. Allocations
for big Gulf deals last month, including Bahrain's 10-year, $1.5
billion sovereign bond, showed investors from outside the Gulf
were increasingly muscling in on new issues.
"Indicative pricing is a couple of basis points cheap to the
existing conventional curve," said Doug Bitcon, head of fixed
income funds and portfolios at Rasmala Investment Bank in Dubai.
"Bearing in mind that sukuk typically trade inside
conventional paper as well as expected demand
from regional banks, the indicative pricing is attractive."
Qatar, the world's top liquefied natural gas exporter,
normally doesn't issue small; it printed a $5 billion,
multi-tranche conventional bond last November, and prior to that
a $7 billion bond in 2009. The sovereign has not issued a sukuk
since 2003, when it priced $700 million of seven-year paper.
The amount of assets made available to back this week's
sukuk suggests Qatar could issue up to $4 billion of paper,
though it has no obligation to do so and many in the market
expect a smaller amount.
This year's largest dollar sukuk issue so far is Saudi
Electricity Co's $1.75 billion 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 $2 billion and $3 billion.
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."
Qatar's outstanding conventional bonds have tightened since
issue in November. The $2 billion, 3.125 percent five-year
portion of its last bond was bid at a yield of
around 2.2 percent on Tuesday morning, according to Thomson
Reuters data. The $2 billion, 4.5 percent 10-year tranche
was at 3.23 percent.
That means the sukuk's indicative pricing is now roughly in
line with the conventional bond for the five-year tenor and
nearly 20 bps wider for the 10-year - implying there may be more
room for the 10-year to tighten in subsequent price talk.
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
According to a ratings release on Monday from Standard &
Poor's, which has rated the potential sukuk AA, on a par with
its rating for the sovereign, the underlying assets will be
state-owned buildings and land in Qatar.
The Islamic debt market has been resilient during the latest
phase of the euro zone crisis and most regional deals so far
this year have been in the form of sukuk. Unrated Dubai issued a
two-tranche $1.25 billion sukuk in April, following Saudi
Electricity Co's issue.
Both those deals were considerably oversubscribed; they
carried a 10-year portion which attracted long-term
institutional investors while at the same time catering to the
regional sweet-spot with a five-year tranche. The Saudi Electric
sukuk attracted orders of at least $15 billion, partly because
of its rarity as a dollar-denominated, investment-grade issue
from that country.
Saudi Electric's 2.665 percent five-year tranche
was bid at a yield of 2.40 percent on Tuesday,
while the 4.211 percent 10-year portion was
yielding just under 3.5 percent, according to Reuters data.
Qatar has hired HSBC Holdings, Deutsche Bank
, Standard Chartered Plc and local lenders
Barwa Bank and QInvest to arrange its deal.
(Additional reporting by Regan Doherty in Doha; Editing by