Calculating an appropriate pricing level, or even just putting together a good set of comparables, for the new Equate Petrochemical sukuk deal was no easy task given the unique nature of the credit, but that didn’t stop the deal finding its feet in the primary market last Thursday.

It is Equate’s sector and ownership structure that made assessing fair value for the US dollar benchmark seven-year Reg S sukuk deal tricky.

Equate (Baa2/BBB) owns and operates several petrochemicals facilities in Kuwait. It is also partially owned by the state. Petrochemical Industries Company, a wholly owned subsidiary of Kuwait Petroleum Company, which itself is owned by the government of Kuwait, and Dow Chemical each hold a 42.5% stake.

Books for the new sukuk opened at a spread to Treasuries in the 170bp area.

Although Equate's existing instruments are illiquid, one way to think about pricing would be to look at those bonds. The company has a US$600m 5.875% May 2030 conventional bond quoted at a benchmark spread of 157bp versus the five-year Treasury and a G-spread of 153bp, according to LSEG data.

“You could take the existing bond, extend it for a year and then decide what discount to apply for sukuk,” a banker close to the trade said, suggesting a sukuk discount of around 10bp would be reasonable.

A prospective investor could also look at similarly rated names from the region, the banker said. Aldar, Almarai, DP World and MAF all fall into the Triple B bracket and have sukuk trading at spreads in the low 100s.

Investors favoured the second method, Equate’s conventional bonds proving too illiquid to provide accurate guidance.

“We see fair value in the Treasuries plus 110bp–115bp area based on trading levels for existing Triple B rated GCC corporates with 2030–31 maturities,” said Faisal Ali, a senior portfolio manager at asset manager Azimut, as the deal was being executed. “We see the new issue generating decent interest given strong liquidity in the Islamic financial sector and rarity of issuance from Kuwait-based corporate entities.”

In the end, Equate priced a US$750m 5% September 2031 sukuk at a spread over Treasuries of 140bp, having opened books in the 170bp area. Orders for the deal topped US$2bn, excluding lead manager interest.

Equate last appeared in international public debt markets in 2021 when it sold a US$700m 2.625% April 2028 conventional bond. Bankers were hopeful that the scarcity value, combined with the spread and quality of the credit, would drive demand for the latest deal.

“It should see good interest because it's rare and its outstandings are pretty illiquid,” a second banker close to the deal said before it had launched. “It’s a good quality issuer with solid ownership but being Triple B it gives a bit more spread than some of those other very highly rated names in the region, like Aramco,” he added. “So, the focus for investors will be that spread pick up.”

Equate has issued sukuk before, although it's far from a frequent name in the market. The last sukuk deal from Equate came in 2017, when it priced a US$500m 3.944% trade that matured in February this year.

Citigroup, First Abu Dhabi Bank, JP Morgan, Mizuho and MUFG were global coordinators, bookrunners and lead managers on the deal, together with KFH Capital, SMBC Nikko and Warba Bank as bookrunners and lead managers.

Source: IFR