GCC Credit Thoughts – October 27, 2009

Feedback from the London leg of the Dubai Sukuk roadshow has been extremely positive for not only the new sukuk issue, but for Dubai as a whole. It seemed like the primary purpose of the presentation was to assure international investors of the deep rooted relationship that exists between Dubai and Abu Dhabi, and the inherent support that has been and will be made available to companies deemed to be of "strategic importance" to Dubai and the UAE as a whole. It was also clarified that the $6.5 billion program is NOT related to the second $10 billion tranche expected into the Dubai Support Fund, but is actually a separate program to support Dubai's CAPEX expenditures for the near future. The proceeds of this program will go directly into the Dubai Department of Finance, bypassing all Federal Government accounts.

The note that I had distributed late yesterday stressed the fact that I believed this was a good opportunity to buy Dubai Inc. (DIFC, JAFZA, DP World, DEWA, WINGS) credit, as those names that fall under that umbrella would be the direct beneficiaries of funds raised, as they are deemed to be of strategic importance to the Emirate of Dubai. Because of a lack of publicly expressed support for these names, we have actually seen their yields expand over the past month. Nakheel, on the other hand, has been in the spotlight, and has seen a significant yield contraction during the same period (see table below). Because of the comments made during the presentation yesterday, it is evident that the companies listed below have not been forgotten, and they are of strategic importance to Dubai, and will be the immediate recipients of any funds raised, should the need arise. I have left DEWA and WINGS off this list, due to lack of liquidity, but they are both names that were also highlighted as key Dubai entities. Because of this open show of support, I believe that we will see a yield compression in Dubai Inc. credit today and over the coming weeks – ergo, a buying opportunity for all Dubai Inc. credit.

Issuer	Yield on September 25, 2009	Yield on October 26, 2009	Yield Expansion (bps)
JAFZA	7.13%	7.79%	66
DIFC	6.25%	6.52%	27
DP World 17s	6.71%	6.88%	17
Nakheel 09s	29.50%	12.50%	-1700
Nakheel 11s	26.30%	22.21%	-409

Back to highlights of the presentation – other points made by Marwan Abedin, Director of Fund Management for Dubai, during the Dubai Sukuk roadshow in London yesterday, included continued emphasis on the relationship between Dubai and the UAE, and how the UAE is a country as a whole and how Dubai cannot be viewed as a standalone entity. He said that HH Khalifa bin Zayed has stated in two Federal meetings that Dubai has a strong support from the federal government and pointed out that the UAE will emerge from the crisis stronger and as one entity, not separate Emirates. Dubai's debt stands at $21.6 billion - most of this was used to support strategic projects for the Emirate.

The top question asked, obviously, was whether Nakheel was considered as "strategic" as other GREs for Dubai and the answer was simple – Nakheel has already received funds from the Government so obviously it was of strategic importance within context of this $6.5 billion program. When asked what other names were of strategic importance, the reply was JAFZA, DP World, DEWA,DIFC and Emirates Airlines, with the implication that they would receive funds immediately when and if required.

Dubai is raising capital through a new $2.5 billion sukuk program that will be composed of both a USD tranche and an AED tranche. The exact size of each of the tranches is unknown at this time. I anticipate the AED tranche to be relatively small, and will likely be structured to cater to local appetite. With regards to the USD tranche, we are hearing whispers of MS + high 300's, which should put the coupon around the 6.5% level. There should be ravenous appetite for this issue for a number of reasons – (1) The global sentiment towards Dubai is warming, now that the markets realize that Dubai is an integral part of the UAE, and that Federal support has been and will be made available if required. (2) Because it is a sukuk, and the demand for new sukuk product is significant, there should be no shortage of buyers of 6.54%, 5 year paper. There seems to be large demand from the International markets – particularly Asia , as Mitsubishi are in the mix as Bookrunners. Deal should be oversubscribed and should perform well in the secondary markets.