Dubai World issued a statement late last night providing some clarity around the restructuring that has been proposed. It was highlighted that alternatives should be considered "in respect to the debt obligations of certain entities within the Group." The restructuring process will only relate to Dubai World and CERTAIN subsidiaries including Nakheel and Limitless – this process will NOT include names like Infinity World, Istithmar and Ports and Free Zone World (DP World, JAFZA, P&O Ferries, EZ World). The total value of the debt carried by companies subject to the restructuring is $26 billion, of which $6 billion relates to Nakheel. Bondholders have been asked to appoint an authorized representative so discussions can commence. I have forwarded the press release in an earlier email.
So, at the essence, Dubai is looking to address the issues that are existent within two sick real estate companies in Dubai – companies that have been severely affected by the collapse of the Dubai real estate bubble. The companies that are actually revenue generating, DP World and JAFZA, will remain unaffected. I believe that a clear cut default is not in the cards – what they are looking to do is get some sort of relief, by way of extension of maturities, of the debt that is immediately facing Dubai World, and are willing to compensate investors for this extension. I believe that if this kind of press release was initially provided to the markets, the reaction may have been less extreme than it has been. Granted, the way that this has been handled has been brutal, at best, but at this time, I believe it is important to put emotions aside and examine the situation for what it is. If you are a Nakheel bond holder, you will likely be asked to extend the maturity of the 2009 sukuk for a step up in redemption value. If you are an investor who still believes in the region, and believes that we will move past this, there are opportunities that need to be identified.
Keeping in line with earlier thoughts to identify names in the GCC that we believe to be attractive and that may have been impacted from the Dubai World news, please see a table below that outlines offer yields pre- Dubai World announcement, offer yields as of 5 pm yesterday and the respective yields offered first thing this morning. I am highlighting what I believe to be attractive.
Issue | Offer Yield - Pre Announcement % | Offer Yield - Monday 5 PM % | Offer Yield - Tuesday AM % | Yield Expansion - Pre Ann. To Tuesday bps |
Abu Dhabi Sovereign 12 | 2.70 | 2.94 | 2.94 | 24.00 |
Abu Dhabi Sovereign 14 | 3.80 | 3.86 | 3.92 | 12.00 |
Abu Dhabi Sovereign 19 | 5.25 | 5.36 | 5.31 | 6.00 |
Mubadala 14 | 3.81 | 4.01 | 4.01 | 20.00 |
Mubadala 19 | 5.88 | 6.07 | 6.14 | 26.00 |
TDIC Finance | 4.37 | 5.14 | 5.02 | 65.00 |
TDIC Sukuk | 4.21 | 5.18 | 4.95 | 74.00 |
Dolphin Energy | 5.38 | 5.61 | 5.61 | 23.00 |
Taqa 6.6 13 | 4.15 | 4.50 | 4.65 | 50.00 |
Taqa 14 | 4.52 | 5.23 | 5.11 | 59.00 |
Taqa 19 | 5.78 | 5.98 | 6.04 | 26.00 |
Dubai Sukuk 14 USD | 6.32 | 8.82 | 8.82 | 250.00 |
JAFZA Sukuk 12 | 8.11 | 17.03 | 17.59 | 948.00 |
DP World Sukuk 17 | 7.11 | 9.87 | 9.76 | 265.00 |
CBB 14 Sukuk | 4.07 | 5.00 | 4.88 | 81.00 |
Qatar 14 | 3.62 | 3.58 | 3.71 | 9.00 |
Qatar 15 | 3.73 | 3.68 | 3.89 | 16.00 |
Qatar 19 | 5.00 | 5.06 | 5.03 | 3.00 |
Qatar 20 | 5.06 | 5.06 | 5.03 | -3.00 |
QTEL 14 | 4.20 | 4.18 | 4.29 | 9.00 |
QTEL 19 | 5.73 | 5.93 | 5.93 | 20.00 |
RASGAS 5.5 14 | 3.92 | 3.90 | 4.11 | 19.00 |
RASGAS 19 | 5.30 | 5.39 | 5.42 | 12.00 |
By looking at these numbers, it is evident that the GCC as a whole, ex-Dubai, has seen yields in sovereign and quasi sovereign issues expand – some more than others. Qatar has been a choice for the "flight to safety" response, and has seen minimal impact to its sovereigns. Meanwhile, there seems to be a trade available in both the TDIC issues, conventional and sukuk, as they have seen yields expand 65 bps and 74 bps, respectively. The Taqa 13's and 14's have seen yield expansion of 50 bps and 59 bps, respectively, and offers attractive levels for a company that provides 90% of the water and electricity requirements for Abu Dhabi and has global operations involved in the downstream, midstream and upstream segments. CBB (Bahrain) 14's have seen their yields expand by 81 bps – I was recommending reducing exposure to Bahrain a few weeks ago, but with yields currently at 4.88%, and the loyal Bahraini market coming back into the office today, I believe that there is an upside available here – liquidity is thin, so would buy when available. Finally, the Dubai names – of the corporates, I believe that JAFZA and DP World look attractive. I have outlined the rationale below. On the sovereign side, I believe the Dubai 14 sukuk, offering 8.82%, up from its issue price of 6.39%, is very attractive.
Moody's said in their report dated November 26, 2009, that Dubai has restated their intentions to strictly adhere to their policy to support only those companies that have viable long term business prospects. Of the Dubai World companies (Nakheel, Istithmar, Limitless, DP World, Dubai Dry Docks, Tejari, JAFZA, DMCC, Dubai Customs World and P&O Ferries), per the latest press release out from Dubai World, the restructuring process will only relate to Nakheel and Limitless, and will NOT include DP World and JAFZA (among others) as they are on "stable financial footing" – the Jewels in the proverbial Crown. DP World has seen its yields expand around 200 bps since before the restructuring news hit the tapes, but JAFZA has been great affected, seeing yields expand in excess of 9%. I believe that this yield expansion presents an opportunity in both of these names, especially in light of the current press release. Below is a brief summary of both businesses:
JAFZA – The Jebel Ali Free Zone operates a 48 square km trade and industrial free zone adjacent to the port of Jebel Ali (seventh largest container port in the World) in Dubai and the planned Al Maktoum International Airport, and is central to Dubai's economy, contributing up to 26% of the Emirate's GDP, and is seen as a vital revenue generator for Dubai. 10% of Dubai's residents are employed by tenants of JAFZA, which earns over 75% of its revenues from leasing land, warehouses and offices to over 6000 companies originating from over 100 countries. JAFZA has a track record of over 20 years, and few regional competitors. Despite the recent economic slowdown, occupancy rates are high, and new customer demand is strong. Because of high sunk costs associated with setting up their infrastructure, renewal rates are high for land leases. JAFZA's only debt is an AED 7.5 billion sukuk which matures in 2012. The JAFZA sukuk offers a yield in excess of 17.50%.
DP World – Dubai Ports World is the fourth largest operator of container ports worldwide, comprising of 49 terminals across 30 countries. It is one of the most geographically diversified container terminal operators, and operates its flagship facility in its home port of Jebel Ali, the seventh largest container port in the World. The company has a very strong competitive position in the industry, as barriers to entry are very high, and DP World enjoys a diversified, high growth port portfolio. The company's breakeven capacity utilization level is approximated at 40%, while they have been operating at levels in excess of 80%, providing a sizeable buffer in the case of volumes contracting. DP World has two sukuks outstanding – a $1.5 billion issue with maturity in 2017 and a $1.75 billion issue maturing in 2037. The DP World 17 sukuk offers a yield of 9.76%.
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