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ANALYSIS

Qatari M&A drive may trigger credit risk repricing

Doha, May 4, 2013

By Rachna Uppal and Mala Pancholia

A foreign acquisition drive by Qatari companies is winning the gas-rich country international attention and economic influence around the region. But it may have a less positive effect on the bond prices of some of the companies.

Blue-chip bond issuers such as Qatar National Bank and telecommunications operator Ooredoo, formerly known as Qatar Telecom, are leading the M&A drive.

In the past, when their business focus was primarily domestic, these partly state-owned companies were viewed by many investors as essentially part of the Qatar government, which is rated AA by Standard & Poor's. The companies could price bond issues very close to the sovereign curve, with almost no new-issue premium.

Spreads on their bonds may now start to reflect the higher risk associated with their global expansion strategy, even though the companies can probably still count on government support if needed.

Investors may look at how much debt the companies take on to fund their acquisitions, and the risks involved in operating in unstable countries in the region.

"This raises the question of whether investors in Qtel or QNB bonds are buying Qatar risk, or a combination of Iraq, Indonesia, Tunisia or potentially Morocco risk," credit analysts at Standard Chartered noted in a research report.

"Thus, the increasingly aggressive acquisition appetite of Qatari credits could start to get priced into credit spreads, with or without rating agency action."

QNB is probably the most acquisitive bank in the Gulf region. After securing stakes in banks in Egypt, Libya, the UAE and Iraq, it is scouting for a majority stake in a top-ten Turkish bank.

It is not the only Qatari lender which feels the need to move beyond its crowded domestic market. Commercial Bank of Qatar agreed to buy a 70.8 per cent stake in Turkish lender Alternatifbank in March, and has reportedly hired two banks for a potential bond sale to boost capital.

Outside the banking sector, Ooredoo is going head-to-head with the UAE's Etisalat for Vivendi's stake in Morocco's Maroc Telecom, which is valued at about $6 billion.

"So far Qtel's acquisitions have been successful, even the ones in the riskier regions such as Iraq," said Apostolos Bantis, emerging markets credit analyst at Commerzbank in London.

But he voiced caution about the Maroc Telecom stake. "Qtel's contemplated Morocco transaction is a bit questionable and perhaps if it finally goes ahead may result in some volatility on its bonds."

Last week, S&P placed its long and short-term corporate credit ratings for Ooredoo on creditwatch "negative" after the company submitted a binding bid for the stake.

"Any meaningful debt increases from the acquisition will lead to a downgrade," said the agency, which currently rates Ooredoo as A.

Ooredoo is also majority shareholder in Iraqi telecommunications operator Asiacell and holds 90 per cent of Tunisiana in Tunisia.

Regardless of acquisition activities, the bonds of Qatari companies are likely to remain in demand among international investors looking for exposure to the Middle East, partly because of the scarcity of investment-grade credits from the region.

But the bonds of both QNB and Ooredoo have come under pressure in secondary market trading in recent weeks.

QNB's most recent issue, maturing in 2020, has struggled in the secondary market since its issue in April. It was bid at 99.296 cents on the dollar on Thursday to yield 2.99 per cent, up from 2.98 per cent last week.

The bond is offering over 20 basis points more than National Bank of Abu Dhabi's 2019 maturity, for an extended maturity of just eight months. Both banks are rated Aa3 by Moody's.

Commerzbank's Bantis said he believed the underperformance of QNB's last two bond issues had more to do with overall spread compression in global markets and aggressive pricing than its acquisition activity.

But the yield on Ooredoo's $1 billion, 2023 bond has widened over 20 bps since the beginning of this year. By contrast, the yield on the Qatari government's $2 billion issue maturing in 2022 has actually narrowed by 1 bp - a major underperformance by Ooredoo that appears at least partly due to company-specific factors.-Reuters




Tags: Qatar | Credit | acquisition |

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