October 24, 2018 / 7:58 PM / a month ago

UPDATE 1-Oman sells $1.5 billion sukuk as Khashoggi crisis raises funding costs

(Adds context, analysis)

By Davide Barbuscia

DUBAI, Oct 24 (Reuters) - Oman sold $1.5 billion in sukuk, or Islamic bonds, on Wednesday but the generous investor returns it had to offer showed that the crisis over the killing of Saudi journalist Jamal Khashoggi is raising funding costs across the Gulf region, fund managers said.

The bond issue is Oman's second public debt issuance this year, as the sultanate borrows internationally to finance a budget deficit caused by a slump in oil prices over the past few years. It follows a $6.5 billion conventional bond issue in January, the country’s largest ever debt sale.

Oman's new debt issue came amid rising investor concerns over the deterioration of Saudi Arabia’s international relations after the killing of Khashoggi, a critic of the kingdom's Crown Prince Mohammed bin Salman.

The sultanate started marketing the seven-year notes earlier on Wednesday with an initial price guidance of about 300 basis points over mid-swaps.

The issue, which received orders in excess of $3.5 billion, was launched with a final spread of 280 basis points over mid-swaps, around 15-20 basis points above what some fund managers considered to be the new issue's "fair value".

A Dubai-based fixed income trader said the added value was not surprising, adding: "The market won't allow Oman to not leave something on the table given the circumstances."

The bonds offer almost 50 basis points more than Oman’s existing $2 billion sukuk issued last year and due in June 2024 .

Even accounting for a premium of around 20 basis points over the 2024 notes for the one and a half year maturity extension, the new sukuk offer investors about an extra 30 basis points which fund managers partly ascribed to the Khashoggi fallout.

Saudi Arabia’s crown prince said at in investment conference on Wednesday that the killers of Khashoggi would be brought to justice. Earlier U.S. President Donald Trump said the prince bore ultimate responsibility for the operation that led to Khashoggi's death.

Saudi Arabia's foreign debt has been under pressure since the crisis erupted, with yields rising across the country's dollar bond curve. Saudi credit default swaps, which investors buy as protection against default, rose to 100 basis points late last week for the first time since June, though they have partly recovered since then.

Despite the volatility, Oman was not the only borrower in the Gulf to brave the markets. Abu Dhabi’s state fund Mubadala and Bahrain’s oil company Nogaholding have announced this week plans to issue international bonds soon.

Gulf International Bank, HSBC, JP Morgan, KFH Capital and Standard Chartered arranged Oman's debt issue. (Reporting by Davide Barbuscia Editing by Matthew Mpoke Bigg and David Stamp)

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