20170320-法国巴黎银行-GCC_credit_-_new_Saudi_sukuk_to_pressure_SECO_spreads_13页_375kb

EM Credit Strategy Summary: GCC Sukuk and Sovereign Issuance Impact

Core Content

This document outlines the credit strategy for Emerging Markets (EM) investors focusing on the GCC region, particularly the impact of potential Saudi sovereign USD sukuk issuance on existing Saudi Electricity sukuk (SECO) spreads. It also provides an analysis of TAQA as an alternative investment for EM investors.

Main Points

1. Potential Saudi Sukuk Issuance

• There is a strong possibility of a Saudi USD sukuk issuance in the near term.
• Fair value for new Saudi sukuk is estimated to be 20-25bp over Qatari USD sukuk, indicating a Z-spread of 70-75bp (5y) and 95-100bp (10y).
• The current spreads for SECO '22 sukuk are around Z + 80bp mid, which is only a few basis points over the fair value of new sovereign sukuk.
• The tight spreads for SECO sukuk are primarily due to their rarity value as the main USD sovereign-linked sukuk in Saudi Arabia.
• If sovereign sukuk are issued, this rarity value will likely decline, leading to pressure on SECO spreads.

2. Investor Strategy: Switch to Quasi-Sovereign Names

• Investors holding SECO sukuk are advised to switch to quasi-sovereign Eurobond names such as UAE, Qatar, or Kuwait due to their lower sovereign issuance risk.
• A specific recommendation is to switch from SECO '22 sukuk into TAQA '23 Eurobonds, which offers a 36bp Z-spread pick-up (after bid/offer) and allows investors to take out ~4.6 points of cash.
• The credit quality of TAQA is similar to SECO, with ratings A3/A/NR versus A2/A-/A+ Neg for SECO.
• TAQA currently trades 72bp over ADGB '21s, which is more attractive than the expected <10bp differential for SECO sukuk.

3. Sukuk Market Overview

• The GCC sukuk market is expected to see increased sovereign USD sukuk issuance in 2017, with a total of USD 3.5bn expected.
• Saudi Arabia is projected to issue USD 2.5bn in sukuk, while the UAE is expected to issue USD 3bn in total.
• The rarity of SECO sukuk makes them more attractive to international EM investors, but this may change with sovereign issuance.
• For sukuk-only investors, the market is illiquid, but RAKS '25s are highlighted as a potential alternative with a 30bp spread differential over SECO '22s.

4. Saudi Electricity Overview

• Saudi Electricity Co. is the dominant electricity supplier in the Kingdom and is 81% government-owned.
• The company has a monopoly on distribution and transmission services.
• It generates negative free cash flow due to high capital expenditure (CAPEX) and receives interest-free government loans.
• Electricity tariff increases in 2016 helped improve revenues and EBITDA, but long-term funding needs remain.
• The company is likely to issue in the sukuk market, potentially putting further pressure on SECO spreads.

5. TAQA Overview

• TAQA is a global energy and utility investor with 75% indirect ownership by the Abu Dhabi government.
• The company has received strong government support, including asset purchases at above-market prices and cost reductions.
• Despite this, impairments and low oil prices have led to substantial losses and a decline in equity.
• TAQA's free cash flow is positive, mainly due to reduced CAPEX and cost reforms.
• The company's financial stability is heavily dependent on sovereign support.

Key Information

• SECO '22s trade at Z + 80bp mid and are expected to trade wider as new sovereign sukuk are issued.
• TAQA '23s offer a spread of 72bp over ADGB '21s and are a viable alternative for EM investors.
• The GCC sukuk market is expected to grow in 2017, with sovereign USD sukuk likely to be issued.
• Liquidity is a concern in the sukuk market, with RAKS '25s being a better alternative for some investors.
• Both SECO and TAQA are highly leveraged and rely on sovereign support.
• EM investors are advised to switch to quasi-sovereign names or RAKS '25s for better returns and lower risk.

Summary Table

Important Information

• The document is a marketing communication and not independent research.
• It does not constitute an offer to sell or issue, nor a solicitation of an offer to purchase.
• BNP Paribas may have financial interests in the issuers mentioned.
• The information is based on public sources and may be subject to change.