New issue premium is back in Gulf's bond market
New issue premium is back in Gulf's bond market
For six months or so, Gulf issuers only had to pay a tiny premium above the secondary-market yields of their outstanding bonds when they issued new debt — or in many cases, no premium at all.
That was because of record-low US Treasury yields as well as the dramatic improvement of the Gulf's image in the eyes of international investors, as Dubai and other economies recovered from the global financial crisis.
In the last couple of weeks, however, it has become clear that a back-up in US Treasury yields and strong global equities mean new Gulf issuers will once again have to pay substantial premiums.
"We have to take into account the global headwinds and investors' mood, as there are periods when the markets go through periods of softness, as the one we are witnessing now in the global markets," said Sami Mahfouz, head of Standard Chartered's global markets business for the United Arab Emirates.
"This needs to be taken into consideration given that significant demand is also from the global investors and not just regional."
In a sense, the Gulf is paying a price for the increase in the popularity of its bonds among international investors last year. Previously, when almost all demand for bonds came from cash-rich institutions within the region, pricing of new issues was partially insulated from global trends; now the global environment cannot be ignored.
After a massive rally at the beginning of this year, emerging market hard currency bond funds experienced outflows for the first time in 35 weeks in the week to Feb. 6, according to data from EPFR Global.
For some analysts and investors, the shift in the bond market is not a short-term phenomenon but the start of a long-term process.
"The great bull market in bonds is coming to an end. People get anchored on a view that a particular asset class is going to give double-digit returns all the time," Gary Dugan, chief investment officer for Asia and the Middle East at Coutts, the private banking arm of Royal Bank of Scotland, said at an event in Dubai last week.
"There is a serious risk that you can lose money in bonds or sukuk this year, so we are telling clients to start looking at equity instruments."
A very few emerging bond markets have been able to ignore the trend. One is Turkey, where Akbank was able to command very tight pricing of its 1 billion lira ($ 530 million) Eurolira bond at the end of January.
The Gulf is not one of those markets, however. The current mood means issuers will need to "leave something on the table for investors to put in the big orders", said one regional fixed income trader.
Another trader estimated borrowers would now need to pay a 15 to 20 basis point new issue premium for longer-dated bonds.
That may be an underestimate; Russia's VimpelCom had to pay a new issue premium estimated at between 25 bps and 40 bps on the dollar tranches of its $ 2 billion bond sale last week.
Dubai paid no new issue premium - it actually priced inside its outstanding bonds - when it raised $ 1.25 billion from a two-tranche bond sale in late January. But the bonds soon came under selling pressure in the secondary market.
The 3.875 percent 10-year sukuk, which priced at par, has traded below par since issue and was bid at 98.0 cents on the dollar to yield 4.116 percent yesterday.
The change in the bond market's tone already seems to be influencing Gulf issuers. There have been no conventional bond or sukuk deals from the region since Emirates airline priced a $ 750 million, 12-year amortizing bond in late January.
Just a few weeks ago, the market was expecting the first quarter of this year to be a busy period for new issues.
One potential borrower is state utility Dubai Electricity and Water Authority (DEWA), which has said it plans a sukuk issue of up to $ 1 billion in the first quarter.
Reuters reported last month that the company had mandated banks for the deal, but Chief Executive Saeed Mohammed Al-Tayer said on Monday that the timing of the issue was still to be determined.
"We are studying it and will decide on it next week," Al-Tayer said, without giving any indication of the tenor.
DEWA's existing $ 1.5 billion, 7.375 percent bond maturing in 2020 was yielding 4.0 percent yesterday, about 40 bps wider than a month ago.
"Tightening spreads are good for borrowers but the region has been mainly considered as a yield play, and investors are interested in generating yield from creditworthy names," Mahfouz said.
The return of the new issue premium while not deter Gulf issuers forever; yields are still a couple of percentage points or more below their level a year ago, and after a period in which they judge whether the new market environment is here to stay, issuers are likely to return to the market.
Abu Dhabi Commercial Bank announced this week that it had mandated banks for a bond sale of at least $ 500 million, while National Bank of Abu Dhabi is to consider issuance of convertible bonds and other instruments at a meeting next month.
But issuers may feel more pressure to come to the shorter end of the market to minimize the premiums they pay.
"Long-dated bonds are going to be tough (to issue) at the moment, but the right type of names can still come to the market. Investors are looking for the yield in the short end," said a regional trader.
Intel CEO resigns after probe of relationship with employee
- Corporations are under increasing pressure to “walk the walk” on executive behavior with the rise of the #MeToo movement
- The board named Chief Financial Officer Robert Swan as interim CEO
Intel Corp. Chief Executive Brian Krzanich resigned on Thursday after an investigation found he had a consensual relationship with an employee in breach of company policy.
The head of the largest US chipmaker is the latest in a line of men in business and politics to lose their jobs or resign over relationships viewed as inappropriate, a phenomenon highlighted by the #MeToo social media movement.
Krzanich led Intel as rival chipmakers ate away at its dominance in the technology over several decades and he also presided over a series of high-level executive departures.
The change in leadership comes as Intel expands beyond personal computers and servers into areas such as artificial intelligence and self-driving cars, where smaller competitors including Nvidia Corp. are strong. Qualcomm Inc. leads in the mobile chip market.
The board named Chief Financial Officer Robert Swan as interim CEO and said it has begun a search for a permanent CEO, including internal and external candidates.
“An ongoing investigation by internal and external counsel has confirmed a violation of Intel’s non-fraternization policy, which applies to all managers,” Intel said in a statement, declining to give any further information about the probe. Its shares fell 2.4 percent.
The company’s board was informed a week ago that Krzanich had a mutual relationship with an employee in his chain of command in the past, according to a source familiar with the matter who asked not to be named. The relationship began before Krzanich became CEO in 2013 and ended several years ago, the person said.
Krzanich, who did not have an employment contract, is entitled to a $38 million “walk-away” payment in the event of a voluntary termination, according to Intel’s regulatory filings.
Of that, $31 million is in the form of accelerated stock awards and $4.1 million in the form of deferred compensation, based on Intel’s share price on Dec. 29.
An Intel spokesman declined to say whether the walk-away payment applied to Krzanich’s resignation, but said the investigation into Krzanich’s conduct continued and that the board reserved the right to take further action.
Corporations are under increasing pressure to “walk the walk” on executive behavior with the rise of the #MeToo movement, said Ivan Feinseth, chief investment officer at Tigress Financial Partners.
In the last few months Martin Sorrell, founder of advertising giant WPP Plc, and casino mogul Steve Wynn of Wynn Resorts Ltd. resigned after accusations of impropriety. Wynn has denied the accusations and Sorrell has denied any wrongdoing.
Krzanich, 58, an engineer and Intel veteran known at the company as “BK,” was appointed CEO in May 2013. Intel shares more than doubled during his tenure as the company expanded into new markets.
He was recently credited with containing the fallout from the discovery of security flaws in the company’s chips that could allow hackers to steal data from computers, although his sale of much of his Intel stock before the flaws were disclosed to investors attracted some criticism.
Time for an outsider?
His temporary replacement, Robert Swan, has been Intel’s CFO since October 2016 and previously spent nine years as CFO of eBay Inc. Given his short tenure and lack of experience in manufacturing, he is not likely to be named permanent CEO, Cowen analyst Matthew Ramsay said.
While Intel dominates in processors for servers and data centers, global competitors are catching up with its manufacturing technology, said Bernstein analyst Stacy Rasgon.
“BK will go down in history as the CEO that let Intel’s process leadership advantage slip away,” he said, adding that a change at the top could bring in fresh ideas.
Kevin Cassidy, an analyst at Stifel, said that Intel would take the change in stride.
“Although we respect Krzanich’s efforts in redirecting Intel’s strategy from a computer-centric to a data-centric company, we view Intel as a process-driven company with a deep bench of CEO candidates that can continue to drive the corporate strategy,” he said.
In its 50-year history, Intel has never appointed a permanent CEO who did not come up through the company’s ranks.
But those ranks are thinner than they used to be, with prominent Intel executives such as former CFO and manufacturing chief Stacy Smith, former president Renee James, ex-architecture chief Dadi Perlmutter and Dianne Bryant, who headed the data center group, leaving in recent years.
Instead, Krzanich’s replacement could end up being one of the outsiders he brought into the company’s executive ranks, a sort of “insider outsider” such as Murthy Renduchintala, Intel’s chief engineering officer who joined Intel in 2015 after helping lead Qualcomm’s chip business.
“They’ve got some very good people they’ve brought in,” said Dan Hutcheson, CEO of VLSI Research Inc, who “know the company, know the new direction. It’s not a turnaround story.”
UBS analyst Tim Arcuri wrote to clients that “the door is open to hire from the outside.”
Intel on Thursday raised its second-quarter revenue and profit forecast, saying it expects quarterly revenue of about $16.9 billion and adjusted profit of about 99 cents per share, up from a previous forecast of $16.3 billion in revenue and adjusted earnings per share of 85 cents.
Analysts on average were expecting revenue of $16.29 billion and adjusted profit of 85 cents per share.
“There are no new payments as part of his departure,” a source familiar with the company told Reuters.