GCC Credit Thoughts – October 26, 2009

I have returned to work after a week in tropical Pakistan, and notice that we have seen some interesting developments within the GCC credit markets. Dubai is on a roadshow to launch a $6.50 billion medium term notes program - $2.5 billion in sukuks and the balance through conventional bonds (though I hear that the conventional bonds will be issued at a later date). That's right – we ain't in Kansas anymore, Dorothy. This is surely a sign of the times, because this would not have been possible in Q.1 2009 – It seems that the global perception of Dubai is turning positive again and there seems to be increased comfort around the support being provided to individual Emirates, in times of need, by the UAE as a whole. Nakheel has been viewed as the gauge to test Dubai's credit worthiness – with all the uncertainty around Nakheel meeting its obligations, it is important to note that it has never been Nakheel that has issued any official statements that question their ability or willingness to honor their debt obligations – in fact, they have maintained the position that all debt will be serviced. Coupon payments have been made, and Nakheel has been repaying loans outstanding, including AED 4.5 billion in bank loans last week. The Nakheel 2009 sukuk has reacted favorably to all of these developments by trading up at the 107.75 level (it was trading at the 105 level in mid October).

The roadshow wraps up tomorrow after a presentation in London today and a trip to Frankfurt tomorrow. I don't believe any of the monies raised through this program will go to the second $10 billion tranche for the Dubai Support Fund (which I believe will be funded by the UAE Central Bank). Here is the latest on what I am hearing on the issue:

• 5 Yr sukuk only – no conventional bond
  
• 2 tranches, USD and AED
  
• The price whisper is MS + high 300 for the USD tranche (5 year mid swaps are currently 2.8225)
  
• The USD issue is going to be a fixed rate
  
• The AED issue is going to be a floater - Pricing likely at 3month EIBOR + high 300
  
• The book runners have already started taking soft orders
  
• The books will open tomorrow and will close most probably by Wednesday
  

TDIC Sukuk is trading well in the secondary markets – I saw yesterday that it was trading around the 4.5% levels, and my thoughts were immediately that it should be trading more in line with the Mubadala 5 years, which trade at the 4% level. I see today that the yields have compressed on the TDIC sukuk and its currently trading at the 4.36% level, and although I like this name from a fundamental perspective, I believe that it may be time to exit a position acquired on the issue, from a trading point of view, and make room for the new paper that is due out soon – Dubai, GE and Qatari Diar.