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Thursday, January 27, 2022

Debtwire - ADNOC to brave market conditions amid feisty Fed talk – MENAT Weekly Comment

Debtwire - ADNOC to brave market conditions...
Vijay Valecha, Special to Debtwire January 27, 2022

ADNOC Murban, a wholly owned subsidiary of Abu Dhabi National Oil Company (ADNOC), is set to brave market conditions with a potential debut issue amid feisty talk from the Fed about an imminent interest rate rise, market participants told Debtwire.

Given the hawkish tone of the US Federal Reserve last night (26 January), many investors are in wait-and-see mode, said one buysider. The Fed had signalled consecutive rate hikes starting in March, which would be its first since 2018.

Market participants are in consensus that the first hike, and potentially following hikes, will be 25bps.

As such “we’re not looking at ADNOC at the moment, it’s too tight for us in this environment,” the buysider went on to say

Others were more optimistic that market conditions would prove no impediment for such a highly rated name though, said one sell-side source. ADNOC Murban was given a long-term rating of AA with a stable outlook by Fitch today.

“Market conditions are not supportive right now given caution around the Fed and interest rates. Fragile EM issuers like Oman and Bahrain will find it difficult to come to market. But for a double Arated name like ADNOC, I see no obstacles despite the backdrop,” the sell-side source added.

ADNOC Murban is expected to issue across the whole maturity curve, a second buysider noted.

“Demand would mostly come from local fund managers for the short duration [paper] in order to hedge their portfolios, [as well as] western real money players to lock in inaugural yield premium on the long duration papers,” a Dubai-based banker added.

Investor demand will also likely be driven by the fact that many will want to store their cash in a relatively secure credit given the risk-off market sentiment now, said the sell-side source.

The company plans to raise between USD 3bn and USD 5bn this year and is considering setting up a multi-year bond program of around USD 15bn, according to Vijay Valecha, chief investment officer at Century Financial.

Despite noise from the Fed, demand for ADNOC Murban’s paper is still expected to be strong given its high rating, with pricing likely to come in at around 2.5%-2.75% for 10-year paper, said the Dubaibased banker.

Others came in with different pricing predictions.

Vijay Valecha, noted that the company would likely offer around 45bps50bps above the comparable 10-year US treasury yield for a 10-year bond.

“Financial markets are now pricing in five Fed hikes this year. Two days ago, the odds of five Fed hikes this year was zero percent. In reaction, two-year Treasuries are selling off sharply in the markets which could influence the pricing of the issue,” he said.

There was some confusion however as to why ADNOC needed to issue through the ADNOC Murban entity.

Still, “this is an integral 100% ADNOC-owned and similarly-rated company, so should price at ADNOC levels,” said a third buysider.

ADNOC’s USD 1.195bn 0.7% 2024 convertible bonds currently yield 1.53%, according to IHS Markit.

"Funds are reluctant to buy fragile credit, but there is no risk with Abu Dhabi. ADNOC will likely start with a small new issue premium. [But] if they go for a bigger amount (over USD 5bn), they may be forced to leave a bigger NIP on the table,” the sell-side source said.

Debt diversification

ADNOC, which has historically financed itself through equity and select bank loans, presented the new debt issuing structure to prospective investors this week, said the second buysider.

“They don't actually need the cash to pay off their debt - they can do that from cash. The intention was to just diversify its funding base,” the same buysider added.

ADNOC Murban will become the primary borrowing entity within ADNOC, with bondholders sitting at the top of the borrower’s cash waterfall for Murban crude sales, which the issuer labelled as a “superior proposition for bondholders”.

According to the investor presentation, investors will have priority over group royalties, operating expenditures, and tax.

Some investors had been puzzled by this structure. “It is a strange entity, I rushed through the netroadshow but I am still a bit unclear [as to] why ADNOC needs Murban,” said the third buysider.

"What real difference does a windfall make for a AA entity? And why aren’t Murban’s ratings above ADNOC's if it is 'superior'," questioned the third buysider.