In a year of comebacks in emerging markets, Oman returned to the international bond market for the first time in nearly 20 years last week with a US $2.5bn offering comprising five and 10-year notes. While the outcome was considered decent by bankers, there were a couple of aspects of the deal that raised eyebrows. One was that the notes are likely to be eligible for inclusion in J.P. Morgan's widely followed EMBI Global Diversified index, even though Oman is considered a high-income economy by the World Bank.
The multilateral institution defines any country with a gross national income per capita of US $12,736 within that category - much lower than Oman's levels. Even so, a sovereign or quasi-sovereign can qualify for inclusion in the Global Diversified index as long as a country's GNI per capita is below a certain threshold for three consecutive years. That threshold changes annually depending on economic variables. If data between 2012 and 2014 were used, Oman would qualify for inclusion in the index. In 2014, for example, its GNI per capita was US $18,340, while the index income ceiling was US $19,708. In 2013, Oman's GNI per capita was US $19,280 compared with an index income ceiling of US $19,585.
J.P. Morgan has yet to make a decision on whether or not the bonds will be included as it considers data for 2015 as part of its review process. Leads, however, are confident Oman will be included in the index, which helps boost liquidity. It meets all the criteria for eligibility,? said one, who added that the likelihood of index eligibility was helpful but not a game changer? for the deal.
The other issue that got bankers chatting was the pricing. With no outstanding curve, leads used feedback from the roadshow. Among other things, investors looked at where Abu Dhabi and Qatar were trading and their respective leading banks. With Omani lender Bank Muscat having US $500m May 2021 notes outstanding, that gave some pointers for price thoughts. Those bonds were trading at a Z-spread of 253bp, according to Eikon.
Surprisingly, Oman began marketing the five-year notes flat to wide of Muscat at mid/high 200s over mid-swaps. It marketed the 10-year tranche at mid-300s. Guidance was set at plus 262.5bp area and plus 337.5bp area respectively, before a revision to 250bp area and 325bp area, plus or minus 5bp on both tranches. The sovereign priced the deal at the tight end, printing a US $1bn 3.625% June 2021 note tranche at 245bp over swaps and US $1.5bn of 4.75% June 2026s at plus 320bp.
It's a bit unusual for a sovereign to be flattish against its banks, said a banker away from the deal. The lead banker said a new Muscat deal would come wide of where the outstanding bond is trading after taking into account a new issue premium. "If you look at where Muscat would come now, pricing looks acceptable,"? he said. The rival banker did acknowledge that Oman's five-year bond was for a bigger size and that liquidity on the Muscat notes is weak in the secondary market.
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