GCC Credit Thoughts – October 28, 2009

It's been relatively quiet in the regional markets as attention seems to be focused on the Dubai Sovereign sukuk issue that is supposed to price later today. We still don't have clarity around what the total issue size will be (total program is $2.5 billion – this issue can be all or a part of this number). What we do know is that demand is very robust and books for the USD tranche are in excess of US$3.5 billion and the books for the AED tranche are now in excess of AED 5.5 billion. The books have been closed for European and US investors and are expected to close for Asian and regional investors later this morning. Pricing is estimated to be close to MS +375 bps for the USD issue and 3 month EIBOR + 375 for the AED floater.

The market does seem to have taken notice of the Dubai Inc. names I had highlighted yesterday (DIFC, JAFZA, DP World etc.) and all of the names were better bid yesterday. Please feel free to take a look at my note from yesterday to understand my thoughts on why I believe these names should be bought at this time and the positive catalysts that I expect in the near future.

In the convertibles space, we saw the Aldar 11's trading well post Q.3 numbers, and it remained well bid towards the close. With regards to numbers for Aldar, we saw a nice move up on the bottom line, with profits increasing 68% QoQ – Q.2 numbers being particularly low is the primary cause for this large percentage increase. Land sales were only AED 102 million (16% of revenue) – historical trends show that this number should be higher. Cash reserves also fell almost 21% QoQ, from AED 13.9 billion in Q.2 to AED 11 billion in Q.3. Given that Aldar stock has moved up 67% since the end of Q.2, and P/B is almost 1x, earnings don't offer a reason for the stock to push higher in the near term. The convert is up 5 points since mid September (From $111 to $116), and since we see the stock pulling back and testing the AED 6 level, I would recommend holders to take profits now – for the long term believers, there will be an opportunity to get back into the name at lower levels, I believe, as the stock comes off in the near future.

The first graph below shows the performance of the Aldar convertible, year to date. The second graph shows the performance of the Adar equity, year to date.