The Weekly Update

EU sanctions against Russia are due to expire in July and will require approval from all 28 EU states for an extension. If the current stalemate persists, another extension for 6 months looks the most likely outcome, even though the sanctions have proved ineffective. Angela Merkel, the German Chancellor, commented at the G-7 summit: “The sanctions are tied to the implementation of Minsk,” and that “We’re hoping for progress in the coming weeks, because there is some activity on this.” But fears of a rapid draw-down in reserves for capital outflows and maturing debt have proved unfounded; while the oil price has almost halved since June 2014 in dollar terms a weaker rouble has mitigated the impact. But year to date oil prices have recovered and the rouble has been one of the best performing emerging currencies rising ~11.5% against the US dollar.

Speaking of oil prices, last week Brent breached the $50 level for the first time this year. News that US stockpiles have fallen for the eleventh straight week held crude prices at around $50, as did news that Nigeria has cut production to a 20-year low. This news should no doubt remain supportive of the Gulf region and the new issue pipeline.

Against this backdrop it is no surprise to see new issues from Qatar. In the Middle East’s largest bond sale so far, Qatar last week announced a USD 9bn deal; the sovereign's first issuance in five years. The order book was unsurprisingly heavily oversubscribed, at ~2.6 times.

We have been long term supporters of the sovereign's paper, not only do the issues trade at very attractive levels, but the country's financial and external metrics remain robust, especially in the face of recent low oil prices. The country has one of the lowest fiscal breakeven oil prices at USD 52.4pb (IMF) and has come on in leaps and bounds in diversifying away from the hydrocarbon sector, with only ~36% of Nominal GDP in 2015 derived from the sector (from ~50% in 2014). The country’s growth also remains strong, at 3.6% last year, despite the sharp fall in hydrocarbon prices and is the also the “richest” country in the world with ~$140k GDP (PPP) per capita. As regular readers know, Stratton Street’s Net Foreign Asset Model (NFA) assigns the country a 7 star rating, which our model projects will remain as such beyond 2020.

The new issues are rated Aa2/AA; Moody’s, the rating agency with the most conservative oil price assumptions this year, affirmed Qatar’s Aa2 rating last month, however, downgraded regional peers for example Oman. The deal was made up of three tranches, 5, 10 and 30 years; issued at +120bps, +150bps and +210bps over Treasuries, respectively. To give some perspective of how attractive these issues are, using Stratton Street’s Relative Value model, we calculated at close Friday that the 30 year, which was yielding 4.6%, was roughly 18% undervalued, after its ~2.5 point rally post issue. Whereas South Korea‘s Aa2 30yr benchmark trades at a very tight spread of +37bps, which we calculate is 10% overvalued, and yields only 1.4%; we therefore see a lot of value in Qatar at these levels.

Next up, markets are eagerly awaiting Saudi Arabia’s impending announcement.

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