GCC Credit Thoughts – November 5, 2009

UPDATE - MEED reports that Dubai has repaid the $1 billion Dubai Civial Aviation sukuk that matured yesterday.

No news is good news on the Dubai Global Sukuk (Civil Aviation) that matured yesterday. I haven't seen anything in the press that confirms that sukuk holders were paid in full, but as this was one of the primary use of proceeds for the Dubai Sukuk issue, and we haven't heard the sounds of screams, so I believe it is safe to assume that all is well. I am sure we will see something hit the wires today with regards to the settlement of this issue, as I believe it would be a very positive milestone for Dubai.

Moody's downgraded 6 Dubai based entities yesterday – DIFC, DEWA, JAFZA, DP World, Emaar and Dubai Holdings. The downgrades were primarily due to increased chatter from the Dubai support fund regarding specific conditions that GRE's would need to meet, to access financial support from Dubai's coffers – Moody's downgrades were based on their assumptions on where these firms would stack up on a scale of their importance to the larger Dubai picture coupled with their standalone credit profiles.

Moody's downgrades and changes of estimations of credit worthiness have typically not had an effect on the market, as it has been viewed that Moody's was catching up to the general market sentiment, and that any uncertainties around each of the issuers was already factored in. In interesting point to note is that when Moody's last examined these names in early August (JAFZA downgraded, DP World, DIFC and DEWA put on credit watch negative), the bonds actually saw their yields contract after the announcement!

Credit	Yield on July 31, 2009	Yield on August 4, 2009	Yield Contraction (bps)
DIFC Sukuk	10.59	10.23	-36
JAFZA Sukuk	12.48	12.08	-40
DP World Sukuk	9.86	9.03	-83

Yesterday, post the announcement, we saw bids and offers pull back a little, but volumes traded were anemic – so in effect, the impact was marginal. This morning, when we examine the impact the ratings changes have had between yesterday's market (pre London open) and today's market (pre London open), we notice that DP World 17s were the most effected, and saw their bids pull back by 0.50 pts while the offers came off by 0.75 pts. The mid price for that name was off by $0.63. As shown, the other names saw little to no real effect. Again, volumes were small.

Moody's Previous Rating	Moody's Current Rating	Bid Nov.4	Bid Nov.5	Change	Offer Nov.4	Offer Nov. 5	Change	Mid Nov. 4	Mid Nov. 5	Change
A1	A3	95.00	94.50	(0.50)	96.00	95.25	(0.75)	95.50	94.88	(0.63)
A1	A3	84.50	84.50	-	85.50	85.25	(0.25)	85.00	84.88	(0.13)
A1	Baa1	95.00	95.00	-	97.00	97.00	-	96.00	96.00	-
A3	Baa1	87.00	87.00	-	88.00	87.75	(0.25)	87.50	87.38	(0.13)

Amlak and Tamweel are back in the news with regards to the proposed merger between the two firms. The UAE's minister of economy has said the planned merger will begin in January and that a solution will begin to be implemented at that time. I think this process is definitely getting some form of momentum (I know we have been waiting for news around this for a while now) but the Tamweel converts haven't seen much of a reaction in terms of price – currently offering around 10.17% YTM. I still believe a trade is warranted on this name due to reasons outlined in my note on October 13^th. A synopsis is below (please see the earlier note for more colour):

• Tamweel was the largest provider of real estate finance in the UAE until it suspended from trading on the local equity exchange in October 2008, due to a proposed merger plan with Amlak Finance, as both mortgage finance companies faced difficulties as global credit markets deteriorated. Whilst a year has passed since the trading suspension of both the mortgage finance companies, little clarity to date has been provided with respect to how the planned merger will proceed. The stock being frozen, and the lack of any clarity around the merger, has resulted in the convertible bond that Tamweel has outstanding, trading down as low as the $31 level in late November 2008. (it's currently trading 166% higher)
  
• Recently, Tamweel's management disclosed that there is some form of UAE legal requirement that requires the whole merger process to be completed by year end 2009, which if turns out to be correct, implies that the Newco could begin operations from early January 2010.

• The proposed Newco that will hold the combined Amlak / Tamweek entities will likely be granted a commercial banking license from the Central Bank of the UAE. This means, under the proposed legislation, all debt issued by Newco will be guaranteed by the UAE Federal Government.
  
• Federal funds will also be committed to the Newco, effectively making it a partnership with the Government of the UAE.
  
• These developments will bring renewed confidence in the convertible, as Tamweel will effectively be a UAE Federal Government entity.
  
• Gradual clarity on the impending merger, its outcomes, and the shape it will take have resulted in Tamweel convertibles steadily increasing in value from the lows they set last year. The graph below shows how Tamweel has moved over the past 12 months.
  
• At current levels, the convert offers a 10.17% YTM, which, in the event that this become a Federal Government partnership, is cheap.
  
• This name should continue to move higher on the back of positive news regarding the merger or Federal support – I don't think this is a question of "if", but more a question of "when." We are now hearing that this could be as early as January 2010.