GCC Credit Thoughts – November 25, 2009

Firstly, best wishes to you and your family for Eid – I wish you a holiday filled with peace, happiness and health.

Is there any real correlation between GCC sovereign bond yields and US Treasuries?

I have had numerous chats with clients indicating that there is no real apparent correlation between the two, and that Abu Dhabi sov's don't trade on a spread to UST's. Not convinced, I decided to do some analysis.

Looking at the chart below, it appears in the last 120 days, the correlation between Abu Dhabi Sovs (5yr) and the 5Yr UST's has gone up to a high of 57.4%, with the current correlation standing at almost 54%. If anything, it appears that the move in Abu Dhabi sov's are getting more in sync with UST's. On the second chart, we see that since August 2009, Abu Dhabi 5 years are continuing to move inline with 5Yr USTs, in a narrow range. We appear to be hitting the top of the range where the Abu Dhabi 5yrs are at a maximum spread to UST's and my view is that this spread will start to narrow soon. I think this will be on the back of the following:

• Increased risk aversion in other asset classes like GCC equities means that fund managers are going to divert funds into safer asset classes like government bonds ahead of year end books close
  
• As the new issue pipeline slows down for this year, the pressure on the secondary markets should ease off and fund managers looking to take a position are likely to do so in the government bonds.
  
• As oil prices continue to stay high above $75, confidence in Abu Dhabi and Qatar will sustain and the natural action will be to buy the shorter dated government paper (3 and 5 year).
  
• Continued uncertainty around the banking GCC sector (whose bonds we are generally seeing better offered) and the risk around the Nakheel repayment still looming could see money being rotated into safe sovereign bonds.

Chart showing the correlation between ADGB14s and USTs

Chart highlighting yield and yield spread movements for ADGB14s and 5Yr USTs

Again, as the year draws to an end, we see investors looking for security for their portfolios, rotating their holdings into high quality sovereign and quasi sovereigns issues. I would continue to recommend that clients stay long these types of names, ex Dubai, while keeping and exposure to Dubai to take advantage of the positive catalysts I expect in the next 3-4 weeks. In addition to security, I also believe that the regional sovereigns offer some capital appreciation opportunities as well. As we see above, there is a co-relation between the US T's and the regional sovereigns – as T Bill rates move lower, we should see the yield for regional sovereigns also decline, which would mean their dollar price would go up. Sovereigns / Quasi's I would look at include Qatar, Abu Dhabi, TDIC, Mubadala, RasGas etc.

GIB is in the market looking to raise $500 million through a conventional 5 year bond offering. Books are rumored to be at the $700mm level at this time, and they are looking to get this wrapped up by the end of this week. This is the last working day for the GCC before Eid, the US is closed for Thanksgiving tomorrow, so I shudder to think how this will happen, but let's see. I think I have been pretty clear about my view on new bank bond issues from the region, and I don't think this will be an anomaly and trade well in the secondary. Details below:

Issuer: Gulf International Bank B.S.C.

Expected Ratings: A3/BBB+/A (Mdy,S&P,Fitch)

Format: Senior, unsecured, RegS registered, Under the MTN program

Size: $500 million (estimated)

Maturity: 5yrs

Coupon: Fixed, semi-annual

Change of Control: Put at par if Government of the Kingdom of Saudi Arabia through SAMA or PIF ceases to own more than 50%

Listing/ Law: London Stock Exchange / English Law

Denoms: 100k+1k

Joint Lead Managers: Barclays / GIBFS / HSBC / UBS

Timing: This week's business

Price Whisper: MS + low to mid 200s