GCC Credit Thoughts – November 3, 2009

Time to rotate out of CBB14 sukuk and into other names offering similar risk, but better upside

The CBB 14 sukuk has seen its yield contract 220 bps since it was issued in June 2009. It is now trading at close to 4.00%,which leads me to believe that it's time to re-examine, from a trading point of view, the fundamentals of Bahrain compared to other sovereign issuers in the region, and identify switch trade ideas.

1. Bahrain is the smallest country in the GCC, in terms of land mass and size of economy.
2. Bahrain is seeing rapidly declining reserves of oil - according to a recent Standard Chartered report titled "Middle East Credit Compendium", reserves are estimated at 125 million barrels, and as they are producing 40,000 barrels a day, there is 10 years of life left in the resource base. **
3. Bahrain ranks #1 in S&P World Oil Price Vulnerability Index, meaning that in the event of a falling oil price, it would see the greatest impact to its fiscal program. As point of reference, Qatar is ranked 8 and Abu Dhabi, the holder of the bulk of the UAE's oil reserves is ranked 13 in the same index. **
4. Per the same report, Bahrain's sovereign debt is only around 20% of its GDP, but it has one of the highest external debt loads in the world. **

If we look at Bahrain's 5 year sovereign sukuk and compare it to other USD denominated 5 year sovereigns in the region, we see that Bahrain is trading at levels that are too close to those yields offered by Abu Dhabi and Qatar. Actually, if we really want to compare apples to apples, we have to employ a yield premium when looking at sukuks vs. conventional bonds – the rule of thumb is usually a 20-25 bps discount for sukuks. If we are conservative, and use a 20 bps discount for CBB14 (offer yield of 3.82%), from the table below, we can see that the CBB14 sukuk is actually more expensive than the 5 years offered by Abu Dhabi and Qatar (3.87% and 3.84%, respectively)!

Issuer	Description	Rating	Offer Yield	5 Year CDS
Central Bank of Bahrain - Sukuk	CBBISC 6.247 06/14	A, A, A	4.02	152.50
Government of Abu Dhabi	ADGB5 1/2 04/08/14	AA2, AA, AA	3.87	98.60
Government of Qatar	QATAR5.15 04/09/14	AA2, AA-, AA-	3.84	85.10
Ras Al Khaimah Capital	RAKS 8 07/22/14	A, A, A	5.62
Government of Dubai - Sukuk	DUGB6.396 11/03/14	Not Rated	6.37	296.90

So, Bahrain has higher CDS levels than either Abu Dhabi or Qatar, a weaker fiscal position than both, a rating that is two to three notches lower, but, yet, we see its sovereign paper trade in line. This makes me wonder what kind of upside is available in the name –which leads me to think why you would continue to hold it. Yes, I think that the CBB14 sukuk gets paid out, but if it has reached its peak levels, which I think it has, wouldn't it make sense to sell it here at its highs, and buy another similar issue that would have similar, if not better risk, and a better chance for capital appreciation?

As a safe trade, I would I would definitely rotate into Abu Dhabi or Qatar sovereigns at this point. But from a trading perspective, I would recommend a switch into either the RAK sukuk or the Dubai sukuk. Both 5 years in tenor – RAK has a similar A rating as Bahrain. I think it has been demonstrated that the UAE is there to support its Emirates, so I believe that we have an opportunity to pick up a higher yield with both of these names, as well as take part in the positive price action I expect. There are 3 positive catalysts expected in the UAE that I believe will have a positive impact on both Dubai and RAK paper:

1. Repayment of the Dubai Global sukuk (Civil Aviation) – this is expected to take place TOMORROW (November 4, 2009)
   
2. Second $10 billion coming into the Dubai Support Fund – expected subscribers are the UAE Central bank, and according to the local papers, banks like HSBC, Ajman Bank and Mashreq Bank.
   
3. Repayment of Nakheel 09 – December 14, 2009

Also, with regards to the Dubai sukuk, it is important to note that the weakness in price we witnessed yesterday, with the sukuk trading at sub-par levels, may have been a result with flippers looking to exit their positions prior to the settlement date, which is today. This way, they don't need to put up the cash for their purchased. Post today, we will see real money involved in the name, and I believe this will result in stability and yield compression in the Dubai 14 sukuks. On the RAK sukuk, I continue to believe that we will its yield shrink as the market continues to get comfort around the relationship between RAK and the UAE Federal Government, and once the new issue pipeline slows down (yields have contracted 200 bps in the past 90 days), and sukuk money starts chasing quality paper in the secondary markets – we saw this happen when there was a lull in the primary sukuk markets, after RAK was issued.

On other market happenings, we see the roadshow calendar for potential new issues continuing to be full:

Commercial Bank of Qatar will be conducting investor meetings for its new issue, starting tomorrow. MS and CS are the book runners. I haven't heard anything about it being Shariah compliant, so I am assuming this will be a conventional issue. The roadshow is global, covering all the major international markets. Nothing yet on size, price etc.

Gulf International Bank is being rumored to come to market over the coming days for a new debt issue. We are hearing that his will be focused on the Saudi markets and will be a SAR denominated issue, 3-5 years in terms of maturity and will trade on the Tadawul debt platform.

ENBD is currently on a roadshow, meeting potential investors

DP World is in the middle of a "non deal" roadshow through North America, currently.

**The data marked with "**" is taken from Standard Chartered's recent research report titled "Middle East Credit Compendium".