CAPITAL MARKETS
Tackling a triple-tranche In an exclusive, Mohammed Khnifer, a debt capital markets banker at a supranational banking institution, suggests a pricing strategy in a triple-tranche deal and how debt issuers can lower cost of funding
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HOW THE CORRECTION ALL STARTED
ne of the fundamentals in conventional or Islamic debt capital markets is determining the right pricing for your cost of funding. This vital issue is a deal-breaker for potential issuers. Some of the biggest emerging market issuers are gradually equipping themselves with former “debt capital market” bankers in order to master the art of pricing and create value for stakeholders. One of the clearest examples of such a strategy is Saudi Arabia’s National Debt Management centre (NDMC). On 22 January 2020, the institution formerly known as Debt Management Office (DMO) priced a $5 billion multi-tranche bond. The story is not on the oversubscribed transaction (an order book of more than $23 billion) but rather on the implementation of the most aggressive pricing strategy since NDMC’s establishment. This led to the correction of the ‘yield curve’s distortion’ for the longer end of the tenor which (at the same time) created a ripple effect for the remaining tenors across the yield curve (which has been repriced as a result). What we have witnessed out of this trade is that Saudi Arabia has taught us how to price sovereign debt strategically. Here is how they did it.
The distortion to the yield curve started two years ago when the 31-year paper was printed at a spread of 210bps (compared to a spread of 180bps a year ago). The spread then widened to 230bps in 2019. In 2020, the 35-year bond was priced aggressively at 160bps over US Treasuries. This tranche saw a discount of around 65bps—the 35-year bonds were priced as if Saudi was issuing a 30-year maturity. The rationale behind this approach is to correct the longer end of the yield curve. Now there should be a ripple effect and we should see a repricing in the Saudi curve. This will be credit positive for new Saudi corporate issuers who will benefit from such pricing advantage.
LEAVING NOTHING ON THE TABLE NDMC took a particularly aggressive approach in terms of pricing after issuing the debt with no premium, not leaving anything on the table. Based on my hypothetical fair value for the new bond (after looking at the outstanding trading levels) the discount is in the range of 6bps to the seven years note and 23 bps to the 12 year one. The calculation is based on the last traded session that was on Friday, 17 January 2020 (as Monday was a holiday) and the deal was
KSA YIELD CURVE AND NEW BOND PRICING KSA Yield Curve (Interpolated)
% Yield
KSA New US$ Bonds
4.25
30Y
25Y
4.00
20Y
3.75
15Y
1Y 2Y 3Y
4Y
5Y
6Y
7Y
8Y
9Y
3.50
12Y
10Y
3.25 3.00
All three new US$ bonds were priced inside the existing curve which led to repricing of the yield curve
2.75 2.50 2.25
Source: Bloomerg/FAB
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BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228
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