Earlier this week the Emirate of Abu Dhabi came to the market with an USD10bn three-tranche bond offering comprising USD3bn in 5-year, USD3bn in 10-year and USD4bn in 30-year notes issued at spreads of UST+65bps, UST+85bps and UST+110bps, respectively. The order book was reported as being USD24bn so it was not surprising that the spreads were tightened 15bps from initial guidance.
The strong demand likely reflects Abu Dhabi’s high rating and positive yield. Abu Dhabi is rated Aa2/AA/AA by Moody’s, S&P and Fitch reflecting its clear credit strengths: Abu Dhabi has a low general government debt to GDP level of 6.8% in 2018 (S&P) and a strong NFA position. Abu Dhabi’s high level of fiscal strength is helped by asset buffers such as its sovereign wealth funds e.g. Abu Dhabi Investment Authority (ADIA): S&P estimate that ADIA’s assets will average more than 250% of GDP between 2019 and 2022. These assets in conjunction with low government debt levels provide a buffer to help offset periods of low oil prices enabling the Emirate to run fiscal deficits. Abu Dhabi’s fiscal position was close to balance in 2018 helped by a recovery in the oil price.
That said, the GCC fixed income markets have been a strong performers YTD helped by greater index inclusion and with that greater investor awareness. Thus, from a valuation perspective, the Emirate of Abu Dhabi now offers less upside than some of Abu Dhabi’s quasi-sovereign issuers. For example, Mubadala 6.875% 2041 rated Aa2/AA/AA by Moody’s/S&P/Fitch, is a quasi-sovereign issuer whose rating is aligned with Abu Dhabi’s given it is 100% owned by the government and its public policy role given the strategic importance of the investment vehicle. This particular issue trades ~3.6 credit notches cheap on our models and trades on a yield of ~3.17%.