Egypt’s comeback bond should pave way for future deals

Robust global demand for Egypt's first bond in five years could prompt it to revisit the debt markets as early as this year, as the Arab world's most populous nation re-establishes itself in the international capital markets.

Such access could prove critical as Egypt tries to rebuild its battered economy in the wake of the Arab Spring uprising of 2011, by improving public finances, providing much-needed dollars and paving the way for Egyptian banks and companies to complete their own deals.

Egypt priced a $1.5-billion 10-year bond on Thursday at a yield of 6 percent, tighter than initial pricing guidance of 6.25 percent, after drawing demand from investors worth three times the final amount.

The B-/B/B3-rated bond, which carried a reoffer price of 99.07, rose to 101.5 in Friday trading before ending the day with bid-offer quotes at 100.25/100.50, despite generally-volatile market conditions due to worries over Greece's future in the euro zone, according to traders.

As well as strong demand from investors whose initial demand was unsatisfied, generous pricing also made the bond desirable.

Egypt's bond was printed at a spread of 360 basis points over midswaps. One possible comparison is Egypt's outstanding 2020 bond, after factoring in for duration, which traded on Friday at 268.49 basis points over z-spread.

Tunisia's $1-billion 2025 bond, rated Ba3/BB- by Moody's/Fitch, was trading at 314 bps over z-spread.

"The pricing was attractive for investors, which should leave the issuer well positioned for future issues," said Abdul Kadir Hussain, who oversees about $1.2 billion in assets as chief executive at Mashreq Capital, which bought the bond.


Egypt was frozen out of the international debt market after the uprising against former president Hosni Mubarak and subsequent rule and deposing of his successor Mohamed Mursi.

The ascension of former army chief Abdel Fattah al-Sisi to the presidency last year has seen a focus on providing stability and a return of foreign investment capital to help revive the flagging economy, which suffers from a lack of dollars and frequent power cuts among other ills.

Among them is the current account deficit, which ballooned to $8.38 billion in the nine months through March 2015, compared with a deficit of $543.1 million in the same period the previous fiscal year.

Ambitious growth plans, widening deficits and desire to create a yield curve may prompt Cairo to tap the debt markets again this year, investors said.

"Given the strong demand, Egypt might follow up with another public market issuance maybe in the five year space or maybe, if they can get the legal issues sorted, a sukuk which I think the market would look at positively," said Mashreq's Hussain.

Finance Minister Hany Kadry Dimian said on April 30 he hoped the country would issue a sukuk at the beginning of the 2015/2016 fiscal year, which starts on July 1, and it had submitted its draft sukuk law to the Islamic Development Bank for advice.

Other Egyptian entities are waiting in the wings. National Bank of Egypt wants to issue a dollar-denominated bond by the end of June, its chief executive said in March.


The distribution of Thursday's offering will provide encouragement to all Egyptian issuers, as most of the bond was taken by Western investors, unlike in the case of other debt deals from the Gulf region, which see half the issue absorbed by domestic accounts.

Gulf states have also backed Egypt through cash grants and petroleum products worth billions of dollars, with companies from Saudi Arabia, the United Arab Emirates and Kuwait following in their government's footsteps with their own investments.

Investors from the United States took 45 percent of the paper, the United Kingdom 35 percent, European accounts cornered 11 percent, while Middle East investors managed to get just 7 percent of the issue. The remaining 2 percent went to other geographies, according to a banker in the deal.

Unlike in the years after the 2011 uprising, when foreign investors into existing Egyptian bonds were largely limited to adventurous hedge funds, the investor base was well diversified.

Asset managers took 72 percent of the issue, bank and private banks 13 percent, hedge funds 9 percent, and supra-national, insurance and pension funds together took 6 percent.

Strong demand came despite Egypt's low credit rating, which restricts many global funds from investing in its bonds.

"We needed the big, long-only asset managers out of the U.S. to support the issue as other classes of investor don't have enough lines for the rating level," the banker on the deal said, speaking on condition of anonymity as he is not allowed to speak to the press.

Egypt's bond was arranged by BNP Paribas, Citigroup, JP Morgan, Morgan Stanley and Natixis, joined by National Bank of Abu Dhabi and National Bank of Egypt as co-lead managers. 

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