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MIDEAST DEBT-Bumpy road ahead for Oman loan after downgrade - IFR
May 16, 2017 / 7:31 AM / 7 months ago

MIDEAST DEBT-Bumpy road ahead for Oman loan after downgrade - IFR

* S&P downgraded Oman to junk status on Friday

* Bond prices fall, especially at long end

* Oman has been seeking $3.6 bln unsecured loan from China banks

* Beijing banker says funding cost to be affected

* But China MLAs have strong-enough balance sheets to handle loan

By Yan Jiang

HONG KONG, May 16 (IFR) - Standard & Poor’s downgrade of Oman’s credit rating to junk status has complicated the sovereign borrower’s first visit to the Asian syndicated loan market.

The agency last Friday lowered the Sultanate of Oman’s rating to BB+ from BBB−, with a negative outlook, saying the country’s external buffers have weakened and are insufficient to mitigate the risk from volatile oil-driven export revenues.

The downgrade came days after Thomson Reuters LPC reported that Oman was seeking a $3.6 billion unsecured, five-year bullet loan from Chinese banks. Bank of China, China Development Bank, and Industrial and Commercial Bank of China are the mandated lead arrangers, with the latter two also acting as bookrunners.

The deal pays an interest margin of 190 basis points over the London interbank offered rate and banks committing $500 million or above will earn an all-in pricing of 210 bps over Libor, based on an up-front fee of 100 bps.

“A downgrade by any of the three major agencies will affect our internal credit rating and funding cost for the borrower,” said a Beijing-based banker, adding that the existing price level looks tight to many Chinese banks outside the big four – Agricultural Bank of China, Bank of China, China Construction Bank, and Industrial and Commercial Bank of China - and policy lenders.

“A downgrade of the borrower’s rating to junk will make its loans hard to sell in the secondary market,” a second banker said.

In a swift reaction to S&P’s downgrade, Oman on Monday obtained investment-grade ratings from Fitch for its bonds due 2021 and 2026. Fitch rates Oman at triple B, while Moody’s gives the country a Baa1 rating, both with a stable outlook.

But the cash price of Oman’s short-dated paper has dropped by between 0.125 and 0.5 cent on the downgrade news. Long-dated paper was hit harder and fell between 1.25 and 1.50 cents.

“Basically it’s been a resetting of Oman’s cost of funding,” said a Dubai-based debt capital markets banker. “If Oman decides to come to market, and they do need to come to market given their fiscal position, then the pricing will be based on the current levels.”

Oman is expected to issue U.S. dollar-denominated sukuk as early as this month, bankers previously said.


The three Chinese MLAs (mandated lead arrangers) for the loan have strong-enough balance sheets to finance the loan without any extra joiners. Oman’s finance ministry is self-arranging the senior unsecured deal.

The downgrade made Oman the second of the Gulf’s wealthy oil-exporting states to drop below investment grade because of cheap crude. All three major credit rating agencies cut Bahrain to junk status last year.

“Oman has been trying to diversify its economy, but until now, it’s still highly reliant on oil exports,” said the Beijing-based banker. “Given the current low oil prices, banks will have to exercise caution when granting loans to the country.”

Oil reached a three-week high on Monday above $52 a barrel after top exporters Saudi Arabia and Russia agreed to extend output cuts until March 2018 to drain a global crude glut. But inventories remain high and output from other producers, including the United States, is still on the rise, keeping prices at under half the record highs of 2008.

In the past two years, some sovereign borrowers with junk ratings have successfully raised funds from the Asian loan market, including the Democratic Socialist Republic of Sri Lanka (B1/B+/B+), the Islamic Republic of Pakistan (B3/B/B), the government of Mongolia (Caa1/B−/B−) and the Independent State of Papua New Guinea (B2/B+, Moody’s/S&P). (Additional reporting by Davide Barbuscia; Editing by Andrew Torchia)

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