Egypt could convert part of the $12 billion of loans and grants pledged by Gulf nations this week into tradable bond securities, a lawyer working with the Egyptian government said. The lenders in question - Saudi Arabia, the UAE and Kuwait - will then have the flexibility to sell the bonds to other investors, should they wish to.

Qatar already has that option: Egypt recently converted $3.5 billion of Qatari loans into bonds through a newly established $12 billion Euro Medium-Term Note programme. The loans made by the other three Gulf nations might be given similar treatment.

"The contributions from non-Qatar states are certainly capable of being represented by notes issued through the programme," said James Healy, a partner at law firm Skadden, which represented Egypt in connection with the establishment of the programme.

According to the programme's prospectus, however, funds raised in the form of notes must be used to finance the country's budget deficit, something that may be less attractive for Egypt compared with the alternative of keeping the money on deposit in the central bank.

"Notes issued through the programme have been authorised under the budget law and have to be used to reduce the budget deficit," said Healy. "Egypt may have more flexibility if they leave the funds as deposits with the central bank, as these can be used to increase foreign reserves."

While turning foreign loans into bonds reduces Egypt's flexibility, the conversion brings clear advantages for the lenders, providing them with tradable securities and formalising the terms of the loans under English law.

"The key advantage is the potential tradability of these securities, which would suggest Qatar might have considered trading them before maturity," said Healy.

Earlier this month, Egypt converted $1 bilion of Qatari loans into bonds under the programme, which is led by HSBC and QNB Capital.

The new $1 billion three-year bonds were issued on July 1 at par to yield 3.5 percent. The transaction follows a $2.7 billion 18-month senior unsecured deal that was issued in late May at a yield of 4.25 percent.

The conversion has another advantage for Qatar, as bonds provide extra protection in the event of Egypt defaulting.

Protection

The EMTN programme documentation sets out that all bonds are subject to English law, and that creditors would have recourse to international arbitration courts in London.

While this doesn't confer complete protection - arbitral awards can still be overturned by Egyptian courts in certain circumstances - the mechanism is useful when dealing with international aid, a Gulf-based analyst said.

"If you think back to Dubai in 2009, part of the support from Abu Dhabi was done by a mechanism where Dubai issued bonds to the UAE Federation," the analyst said.

Unusually in the case of Egypt, the coupon on the second bond deal is on easier terms than the first, at 3.5 percent compared with 4.25 percent, despite having a longer tenor.

This may be partly because the second deal is smaller, but it could also be a sign that Qatar is trying to ease the burden on Egypt, said Souheir Asba, an EM strategist at Societe Generale.

" would have a weighted average yield they want to get, but on the specific tranches they might decide to go a bit lower, depending on what they think is Egypt's ability to pay," she said.

"Qatar wants a firm commitment from Egypt. They want to be sure they will get their money back and this is the best way to do it."

True Price

If Egypt was to issue a new three-year US dollar bond in the public market, it would probably have to price it at a yield of around 7.25 percent, a trader said.

In its last public bond issuance in April 2010, a 10-year note priced at 5.75 percent and a 30-year at 6.95 percent. They were trading at 8.4 percent and 8.97 percent on Friday.

Since 2011, Qatar has made deposits of USD8bn in total to Egypt. Of this, about USD5.5bn is expected to be converted into bonds, a source said, suggesting that a further USD2bn could follow when the political situation in Egypt stabilised.

The Saudi funds comprise a $2 billion central bank deposit, $2 billion in energy products and $1 billion in cash; Kuwait will divide aid into a $2 billion central bank deposit, a $1 billion grant and $1 billion in oil reserves; and the UAE will make a $1 billion grant and will offer a $2 billion loan, the three respective state news agencies reported last week.

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