CORRECTED-(OFFICIAL)-Explicit guarantees a boost but risk for Gulf bonds

By Rachna Uppal

DUBAI, Aug 11 (Reuters) - A pair of recent Gulf bond deals where governments offered explicit guarantees attracted better terms and fat order books but analysts say such moves risk distorting the market and harming it in the longer term.

Qatari Diar, real estate arm of Qatar's sovereign wealth fund, sold a $3.5 billion dual tranche bond last month. It was the first state-guaranteed transaction in the region and largest this year, attracting a massive order book.

On the heels of that issue came a $1.5 billion issue from Waha Aerospace, a subsidiary of Waha Capital which was 'irrevocably and unconditionally' guaranteed by the Abu Dhabi government.

These helped boost issuance in the Gulf Arab region in the second half after a slow start hit by the euro zone debt crisis and uncertainty over government conglomerate Dubai World's restructuring.

The two guarantees were motivated by exceptional circumstances, with Qatari Diar otherwise facing a challenge to raise a deal of that size linked to a property firm in the Gulf, where values have fallen by half in two years.

For Waha Aerospace, it helped a virtual unknown get a bond away without a roadshow.

But some analysts warn that such explicit guarantees could have undesirable consequences.

'It would be a dangerous extrapolation for market participants to think that two back to back explicitly guaranteed issues sets a trend for GREs (government related entities),' said Chavan Bhogaita, head of credit research at National Bank of Abu Dhabi (NBAD).

'In spread terms, these bond issues should trade close to the sovereign curve that they're linked to, distorting the market.'

Bhogaita also argued that too much help for GREs would harm state efforts to have such entities stand alone.

'Issuing guarantees on a broad brush basis is not consistent with that,' he said.



DUBAI WORLD HIT

The shock call by Dubai World last November for a standstill on well over $20 billion in debt led to a flight of capital from the region.

That shook investor confidence in implicit guarantees that had helped spur dramatic growth in the Gulf and new issues dried up.

'Guarantees are a very good tool but you've got to use them in a smart way. You certainly don't want to create a bunch of contingent liabilities just because you can,' Andrew Dell, HSBC's head of debt capital markets for central and eastern Europe, Middle East and Africa.

HSBC was one of the lead arrangers of the Qatari Diar deal, and Dell said more sovereign-backed issues were possible.

'As a means to boost the deal size and ensure smooth deal launch I think these structures are effective,' said John Bates, head of fixed income at asset manager Silk Invest.

'A full-blown guarantee from the government will always attract existing holders of the government debt itself - there is already a captive market for such issues.'

He said the lower yields that come with explicit guarantees might be a turnoff for some investors.

Moody's Investors Service and other ratings agencies have begun to assess the credit risk of regional GREs on a strictly standalone basis.

But Moody's assigned the Waha Aerospace deal a rating solely on an assessment of the guarantor, Abu Dhabi government.

'We look carefully at the guarantee terms and conditions - any weaknesses or holes would likely cause us to assign a lower rating to the guaranteed bond (if at all),' said Khalid Howladar, senior credit officer at Moody's.

'Ultimately though, most parties providing a guarantee will try to ensure it's watertight.'

(Reporting by Rachna Uppal; Editing by Jason Neely) Keywords: BONDS GUARANTEES/ ([e-mail]; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.