Strong demand may prompt Qatar Telecom to rethink 1 billion bond cap

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Dilawer Farazi, portfolio manager at Invest AD in Abu Dhabi, said investors viewed Qtel as a play on the sovereign curve, but with a small premium over Qatar government bonds.

“Investors are typically getting over 50 bps of spread pick-up over the sovereign in an entity that is majority-owned by the sovereign,” Farazi said.
“The company is fundamentally strong, and with assets in Iraq, Algeria and Tunisia it has access to markets that should grow.”

Qatar issued a $4 billion Islamic bond, or sukuk, earlier this year in a two-tranche deal which attracted orders of over $25 billion in total.

The $2 billion, 3.241 percent tranche maturing in January 2023 was yielding 2.8 percent on Wednesday, according to Thomson Reuters data, about 113 bps over 10-year U.S. Treasuries.

At current guidance, Qtel is offering about 65 bps premium over the sovereign, which should ensure a healthy order book. Two regional traders said they expected the launch guidance to tighten to 175 bps over U.S. Treasuries.

“The reason people are anticipating such tightening is because allocations will not be satisfactory and the paper will be heavily oversubscribed,” said a regional fixed income trader, requesting anonymity.

Yields on Qtel’s existing bonds have also fallen significantly, reducing the company’s borrowing costs.

The $1 billion 2021s were trading at a z-spread of 168 basis points on Wednesday and the $750 million 2025 maturity at 186 bps, according to Thomson Reuters data.

The z-spread is a pricing tool which calculates the number of basis points that need to be added to a zero-coupon yield curve to make the bond's discounted cash flows equal the bond's present value.

Qtel International Finance, a wholly owned subsidiary of Qtel, will issue the bond under its $3 billion global medium-term notes program, listed on the Irish Stock Exchange. Proceeds are to be used for general corporate purposes as well as to refinance existing debt, according to the bond prospectus.

Whether the company really needs to raise funding from the debt markets though is in doubt.

Its next bond maturity is a $900 million repayment in 2014 and it has $2.5 billion in loans to repay up to 2015, according to Thomson Reuters data.

Qtel’s total debt at the end of September was $9.1 billion, according to an investor presentation seen by Reuters, and the company had $4.5 billion in cash in hand as of Sept 30.

It is one of the most acquisitive firms in the region, though, and has spent nearly $4 billion this year to take majority ownership of its Iraqi telecom unit Asiacell and Kuwaiti arm Wataniya, Kuwait’s No. 2 telecom operator, in separate deals.

Qtel is understood to be preparing a preliminary bid for Vivendi's 53 percent stake in Maroc Telecom, one of Africa’s main telecom operators, which the seller hopes will fetch 5.5 billion euros ($7.15 billion).

Qtel has hired JPMorgan Chase to advise, sources told Reuters earlier this month, but is expected to face competition from South Korea's KT Corp, as well as France Telecom, and Etisalat.

The company is due late on Wednesday to price its bond issue, which is 144a-compliant, meaning it has met U.S. regulatory requirements. Strong interest from U.S. investors, usually keen on longer-tenor bonds, could prompt the borrower to add a second tranche ahead of the launch.

Earlier this month, strong demand allowed the Kingdom of Morocco to print a 10-year note inside its euro secondary curve on a swapped basis and add a 30-year tranche to boot.

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