GCC Credit Thoughts – December 16, 2009

Now that we know that the Nakheel 09 sukuk is going to be paid off, in full, by December 28^th, let's examine some of the fallout from the recent debacle.

Digging Dubai out of its upcoming debt burden…the primary task.

• According to Goldman Sachs at least $55 billion of Dubai and its GRE's bonds and loans are due in the next three years. They claim that yesterday's bailout was "only the beginning of a comprehensive financial realignment process which may involve asset sales, debt restructuring and liquidation of insolvent entities. It is clear additional aid from Abu Dhabi will be needed."
• Soon, it may be announced that another state-owned company, Dubai Holding LLC, may join Dubai World in restructuring its debt (Though B of A would disagree – they recently put Dubai Holding debt on the "overweight" list!)
• It's an almost given that the Dubai World restructuring process may involve haircuts and a significant extension of loan maturity for banks (next week, the banks are supposed to sit down to discuss next steps in the restructuring process)

If we have to pick a regional winner that has emerged from the situation, that would be Abu Dhabi.

• Monday's $10bn bailout by Abu Dhabi has the market speculating that this action is likely to come with political strings including AD possibly seeking strategic equity stakes in Dubai assets, and reining in Dubai's independence in foreign policy.
• The rumor mill is spinning with stories that Dubai will have to give up prized assets like Jebel Ali Port, Dubai Metro and Emirates Airlines to Abu Dhabi.
• Abu Dhabi's rulers are also likely to be selective in their future financial support efforts and will not be writing any blank cheques.
• In fact, the balance $6bn of the recent $10b bailout package from AD is contingent upon Dubai reaching a successful restructuring agreement with their banks on the debts outstanding.

Possible future downgrades on UAE Banks

• Moody's has placed 4 additional UAE banks on review for possible downgrades stating that the rating review is "to assess the resilience of these banks to the potential continued deterioration in Dubai's operating environment, including their exposure to the ongoing restructuring of Dubai World companies' debt"
• Abu Dhabi Commercial Bank PJSC, Commercial Bank of Dubai, Dubai Bank and HSBC Bank Middle East Ltd were put on credit watch today, after downgrading the ratings of Emirates NBD, Mashreq Bank and Dubai Islamic Bank last week.

Further pressure and volatility on the bond markets expected

• The cost of funding for Dubai and possibly AD will likely increase on the back recent events and further downgrades by the ratings agencies.
• EM fund managers will be forced to dispose of GCC credit that has been reduced to speculative grade status – this list includes DIFC, JAFZA and DPWorld.
• The entire region will be re-priced to account for additional perceived risk and lack of transparency that we knew was always the case, but that has been put in the spotlight recently.

What should investors do at this time – I stand by the views I had expressed yesterday

• A large element of uncertainty remains in the UAE, specifically Dubai – with this, comes selective opportunity – I would carefully pick key Dubai names that are still trading at wider spreads than they were, pre crisis, with expectations that they should trade at levels similar to, if not equal to, those offered on November 24^th. Names I would continue to highlight are Dubai Sovereigns, DP World and JAFZA
• I would continue to look at non Dubai names that have suffered as a result of this situation either by contagion effect, or those that seem to be valued as core assets to their sovereigns; i.e. major revenue generators.
• I also advise accumulating sovereigns that are lagging their peers.
• In Abu Dhabi, I would look at the 12's and 14's as they have not tightened as much as the 19's, and Dolphin Energy (largest revenue contributor to Mubadala)
• The banking sector in the UAE is still a little dicey, but I would still continue to look at FGB 12's and NBAD, keeping in mind the UAE Central Bank's willingness to support their banks.
• In Qatar, I would focus on the RasGas 14's and RasGas 19's.
• I am still bullish Qatari sovereign credit (even though it has tightened significantly), because in the event that there is any further uncertainty or negative headlines, on the UAE, money will continue to migrate there first, and we may see further tightening.

Issue	Offer Yield - November 25th AM	Offer Yield - December 16th AM	Yield Expansion
Abu Dhabi Sovereign 12	2.65	2.81	16
Abu Dhabi Sovereign 14	3.8	3.97	17
Abu Dhabi Sovereign 19	5.25	5.27	2
FGB 12	4.04	5.3	126
NBAD 4.5 14	3.92	4.74	82
Dolphin Energy	5.38	5.65	27
CBB 14 Sukuk	4.07	4.27	20
DUGB 14$	6.32	7.64	132
DP World 17	7.11	8.43	132
JAFZA	8.11	12.75	464
Qatar 14	3.62	3.57	-5
Qatar 15	3.73	3.86	13
Qatar 19	5	4.99	-1
Qatar 20	5.06	5.09	3
Qatar 30	5.84	5.99	15
Qatar 40	6.11	6.27	16
QTEL 14	4.2	4.33	13
QTEL 19	5.73	5.99	26
RASGAS 5.5 14	3.92	4.1	18
RASGAS 6.75 19	5.3	5.42	12