The Daily Update - The search for value continues...

Earlier this week Al-Qabas newspaper reported that Kuwait is looking to abolish public subsidies on, for example, water, electricity and fuel by 2020. It is estimated that these subsidies along with fiscal support account for ~USD3bn, so roughly 5% of forecasted spending in the current fiscal budget. In September the government partially lifted subsidies, with some fuel prices pushed up by as much at 83%; regular gas is still at a lowly USD 0.28 per litre!

With one of the lowest fiscal and external breakeven oil prices, the Gulf State has been able to weather lower oil prices to a greater extent than some of its regional peers, like Oman and Bahrain for example. However, Kuwait has also been a lot slower at diversifying its economy away from hydrocarbons, compared with its GCC counterparts like Qatar, and thus remains one of the most oil dependant economies in the region in terms of government revenues and exports. 7 star rated Kuwait is the highest ranked country in our Net Foreign Asset (NFA) universe, ahead of Hong Kong and Qatar.

We have in the past held debt issued by the country’s quasi-sovereign issuers, however we cannot find attractive enough value currently. Last week we saw a new deal from Equate Petroleum, a petrochemical producer based in Kuwait. The company issued two tranches in a USD1.25bn deal; the 5-year tranche was issued at +195bps over Mid-swaps while the 10-year launched at MS+270bps or ~255bps over Treasuries. The deal was ~2.3x oversubscribed. Rated Baa2 by Moody’s only, we did NOT add this holding to our portfolios despite the quasi-sovereign nature and strategic importance to the Kuwaiti economy as our proprietary RVM calculated that the bond did not offer an attractive risk-adjusted expected return, nor sufficient credit notch cushion versus other regional holdings within our portfolios. Currently the bond offers an expected return of 4.7% and only 1.4 credit notches of support. The new Saudi Government 10-year issue, rated A3, on the other hand offers in excess of 7.2% expected return and almost 4 notches of protection.

Our projections for Net Foreign Assets help us identify the countries likely to be upgraded (or downgraded) owing to current account imbalances, and our RVM allows us to recognise exceptional risk-adjusted value and credit notch cushion within our investable universe. As such, on a weighted average basis, our single A rated portfolios have in excess of 3 notches protection and offer over 3.5% in yield terms.

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