GCC Credit Thoughts – November 9, 2009

The Dubai Department of Finance finally announced yesterday that the $1 billion Dubai Civil Aviation Sukuk was repaid in full on the 4^th of November. The market had already assumed that the repayment of this sukuk wasn't a cause for concern, especially since the DOF had specifically outlined that as one of the use of proceeds of the $1.93 billion sukuk issued by Dubai on October 28, 2009. Onwards and upwards – next milestone would be the second $10 billion tranche of support for the Dubai Support Fund, and then, next stop, Nakheel in December 2009. Mr. Khalaf Al Habtoor, Chairman of the Dubai based Al Habtoor group says it best in his article in today's Khaleej Times when he writes, "Almost exactly a year ago, an article in Britain's Sunday Times was almost gloating in its message 'The Party's over in Dubai'…The writer got it spectacularly wrong. The lights may have flickered briefly, but the party's just beginning."

Commercial Bank of Qatar was in Dubai yesterday, to give potential investors an overview of their proposed new bond issue. The issue will be in two tranches – a 5 year senior note and a 10 year subordinated note. Price whispers for the 5 year tranche are at the MS + mid 200's level and for the 10 year tranche, we are hearing MS + high 300's. Management has said that they are eyeing benchmark sizes for both tranches, though we are hearing that anywhere between $1.2 billion - $1.5 billion is the target number, evenly split between the 5 and 10 years. These are conventional bond issues, and will not have a Shariah compliant structure around them. Bookrunners on the issue are Morgan Stanley and Credit Suisse, and we expect books to open today, and pricing to be on Tuesday the 10^th of November.

CBQ has a senior unsecured debt rating of A1 from Moody's and a subordinated debt rating of A2 from Moody's. The Bank's long term local and foreign currency rating is assessed to be A, A1, A-, by the major rating agencies. The capital raised from this exercise are indicated to be used by CBQ for general corporate purposes, including repayment in full of the $380 million floating rate term loan due this month. CBQ will use the proceeds from the 10 year subordinated notes for the purposes of calculating the Bank's CAR, and will treat it as Tier II capital.

CBQ is the second largest bank in Qatar based on total assets, loans and deposits. The Government of Qatar has proven itself to be a strong sponsor of the local banks, and has taken steps recently to increase liquidity into its domestic banking sector. The QIA (Qatar Investment Authority – Qatar's sovereign wealth fund) has been implementing its plan to buy 10-20 % of domestic banks listed on the local stock exchange – They have purchased 5% of CBQ and have announced plans to purchase an additional 5% of the company in December. Also, the Qatari Government has been providing support to its local banks by purchasing their equity portfolios – CBQ sold its portfolio to the Government in March, and has retained a 5 year right to repurchase the securities at the price at the original sale price. Finally, the Qatari Government announced that it would purchase the Real Estate portfolios, at the net book values, from local banks – CBQ sold loans, advances and other exposure for a total of QAR 3.04 billion.

New bank issues over the past 4 months have not outperformed, when compared to the overall regional credit markets. The table below shows the performance of the issues by NBAD and ADCB, from the time of issue till today:

Issuer	Date of Issue	Tenor	Yield at Issue	Current Yield	Delta
ADCB	Oct-09	5 Year	4.84%	5.13%	-0.29%
NBAD	Sep-09	5 Year	4.57%	4.43%	0.14%

In general, I am cautious about regional bank related credit, and wouldn't jump into the banking sector, as I believe there are better opportunities to capture yield and capital appreciation elsewhere. That being said, it is obvious that CBQ is a well capitalized, well supported bank deeply entrenched in an economy that is seeing rapid economic growth (more on the macro factors effecting Qatar in a follow up note). The odds of this new issue running, in terms of price, away are slim, in my opinion, but I believe it will not trade sub-par – it's a quality name. CBQ is a good credit for long term investors, as I believe there is little downside, but definitely not a name for "flippers."