GCC Credit Thoughts – December 23, 2009

Apologies for being quiet over the past week, but things are fairly quiet in the markets, as many participants in the regional credit markets are away, while others have squared their positions and are shutting down their books for the year.

I will be back with my commentary in January and until then, best wishes to you and yours for a wonderful holiday season.

Here is to a healthy, happy and prosperous 2010.

All the best,

Saad

GCC Credit Thoughts – December 17, 2009

• It has been relatively quiet in the regional markets (thankfully) as we head into the Holiday season.   
  

   
   

• Yesterday saw Dubai's 5 yr sovereign spread more or less unchanged at 435 bps and Abu Dhabi 5 yr CDS was trading marginally tighter at 150 bps.
  

 

• The Dubai sovereign sukuks closed a touch lower, after a pop early in the day.  Seems like investors are continuing to book profits in this name, as it moves closer to par levels. Our flows were skewed towards better buying on both the USD and AED issues.
  

 

• We continue to see selling in most Dubai Inc names (DIFC, Jafza, DPW) and saw them close ¾ to 1 point lower on the day.
  

 

• In Abu Dhabi names, the theme from last week continues with better buying in ADGB sovereigns and selling in the quasi sovereigns (Mubadala, Taqa & Dolphin).
  

 

• We are seeing good 2 way flows in Aldar14s at 104 level. (Though Aldar 14's are yielding 7.53% today, going into year end, with negative sentiment surrounding the UAE and a potential Moody's downgrade looming on the immediate horizon, I wouldn't be a buyer today – I always come back around to the same thought process – What is he likelihood that I can buy this bond at similar, if not better levels in the near term? I think the likelihood is high.
  

 

• Qatari sovereign paper was more or less unchanged on the day and the Qtel19s, trading at 113, was seeing better buying interest.
  

  
   

• Reuters published an article last night titled "Dubai May Repay Nakheel's outstanding 2010, 2011."  The article quotes a number of bankers and a particular London based hedge fund manager who believes that Western investors, who didn't have previous exposure to the region are using Abu Dhabi's bailout as a catalyst to become interested in quasi-sovereign Dubai entities.  I agree with the Moody's analyst who is quoted in the article with the fact that this is a dangerous strategy.  I believe that one thing that has been made very clear over the past few weeks is the fact that there is no blank cheque from Abu Dhabi to pull Dubai out of its debt based quagmire.  Selected assets will be supported, depending on their significance to the Emirate, and to the UAE, in the larger sense.  The Nakheel 09 sukuk was an anomaly – a company that would not have received this sort of attention in alternate circumstances.  The fact that the sukuk was so widely held, carried a Dubai World guarantee, and the fact that there was no legal framework available in Dubai to deal with a situation that would have been created if a default would have occurred, led to it being paid out in full.  With the new insolvency laws in place, a Tribunal in effect, no more Dubai World guarantees in the cards, I can't help but think that the table is set for the Dubai World restructuring to go ahead – Nakheel and Limitless have been singled out.  Maybe the Nakheel 10's and 11's get paid out in full, which I don't believe will happen, but it won't be without a similar roller coaster ride to the one we recently experienced.  I, for one, could do without the added drama in my life.  I would sell those two sukuks into any strength if I owned them.  If I didn't, I would stay away.  If you are looking for some excitement in your life, I would go with Tamweel.  It's off about 15 points during the past couple of weeks and it has been reported that the UAE plans to merge Tamweel and Amlak into a new Islamic bank, which it would capitalize with UAE Federal level funds to double their capital base (AED $5 billion).  Getting a commercial banking license is key, because then the funds held at Tamweel would be protected by the Central Bank, the Central Bank, in accordance with their recent statements that provided support for all UAE banks, regardless of their exposure to Dubai World and Nakheel, would be a key ally and, best of all, the UAE Federal Government would be partners with the two lenders in this new venture.  If I had to weigh the option of getting involved with Nakheel (no description needed) and a potential UAE bank that is partially funded by the Federal Government, I would pick the latter.
  

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

GCC Credit Thoughts – December 15, 2009

Christmas came early yesterday as Dubai received an 11^th hour, $10 billion (on similar but not identical terms as the previous $10 billion, which came at a 4% interest rate from the UAE Central Bank), bailout package, earmarked for Dubai World from Abu Dhabi. This was, first and foremost, to be used to pay out the $4.1 billion that Nakheel owes to holders of its sukuk that matured yesterday – this is to be repaid, in full, within the next 14 days. The balance of the $10 billion will be used to repay contractors, suppliers, interest and to meet operating expenses until April 30, 2010. This announcement came with a very positive statement from Sheikh Ahmad, Chairman of Dubai Fiscal Committee, who said that Dubai would always act in accordance with internationally acceptable financial practices and that Dubai's "best days were yet to come." Sh. Ahmad announced that there would be the establishment of a new law based upon internationally accepted standards for transparency and creditor protection. This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations. He also said that the Central Bank would continue to provide support for the UAE banking sector. This was followed by a press release from the UAE Central Bank which stated that it stood behind all the UAE banks, including those with exposure to Dubai World and Nakheel.

Later in the day, we saw a Royal Decree issued by Sheikh Mohammed, establishing a tribunal in the DIFC to oversee the restructuring of Dubai World's $26 billion of debt. The purpose of this tribunal is to handle any disputes that may arise during the restructuring process, as Dubai World creditors will be prohibited from filing claims in Dubai's courts, but will have to make their case in front of the tribunal. This is a positive for creditors, as the DIFC courts have laws and regulations that have been amended to reflect insolvency laws that are de rigueur in the US and the UK. Also, the formation of the tribunal and the establishment of this new legal framework will make the UAE bankruptcy laws more robust, which will be very important for other companies and creditors dealing with the issue, in a developing market like Dubai. Looking at IFC statistics, creditors in the UAE get an average recovery rate of 10.7% in the event of bankruptcy – this is the lowest recovery rate in the GCC, and the second lowest in MENA, as a whole. The only country with a lower recovery rate is Mauritania, which has an average of 6.7%.

So, the Nakheel 09 sukuk gets repaid, the DFM equities market is limit up on low volume, the AD bourse is up almost 8%, Dubai's CDS levels drop 111 bps to 430 (lowest levels since November 24^th – the day before the DW standstill announcement)and the GCC fixed income markets all move higher…..what next? Does my risk appetite for Dubai increase on the back of this $10 billion bailout? Would I jump in and start buying all Dubai risk going into year end? The answer for both, in my opinion, is no.

I believe that what happened yesterday was a very positive step for Dubai, the UAE and for the region. I believe that the receipt of a cash injection from Abu Dhabi shows that some sort of agreement has been reached between Dubai and Abu Dhabi, which will allow both Emirates to work very closely together, going forward, to build a more robust UAE, rather than a fragmented composite of individual Emirates. For the region, I believe it removes a degree of negative sentiment that was hovering over the region. It is important to keep in mind that Nakheel was a piece of a larger puzzle – Dubai still has a large amount of debt that needs to be settled, and while doing this, its reliance on Abu Dhabi will continue to grow. Dubai owes a minimum of $50 billion over the next 3 years, with $13 billion due in 2010 and another $25 billion in 2011. The restructuring of Dubai world still needs to be completed, and creditors still need to be serviced.

The ratings agencies still have Dubai GRE's on credit watch negative, and S&P said yesterday, "we will continue to monitor the situation closely, and any ratings action we take on Dubai-based GREs based on the question of potential government support will be grounded in clear and publicly stated policy that is supported by appropriate laws and/or instruments….
we believe uncertainty remains as to the Dubai government's general ability and willingness to provide timely extraordinary support to its government-related entities (GREs), as well as the transparency and predictability of such support." One thing that has become very clear during this entire episode has been the level of clarity and predictability the market relies on to make intelligent investment decisions is lower than previously assumed. The level of blanket support that Abu Dhabi would provide to Dubai in the event of a further crisis is difficult to quantify. I believe that the ratings agencies will discount the implicit support provided by the Government and start to look for more explicit guarantees, and in the absence of such, will start examining regional GRE's on a standalone basis. An element of concern remains in the UAE, specifically Dubai, as uncertainty continues to loom and headline risk remains. The last thing I would want to do, at this time, as add risk to my books.

I would continue to look at names that have suffered as a result of this situation (with expectations that they would trade at the levels where they were trading on the 25^th of November) and seem to be valued as core assets to their sovereigns – major revenue generators. I would also look for sovereigns that are lagging their peers.

In Dubai, I would continue to focus on the Dubai sovereign sukuks (+107 bps), DP World (+113 bps) and JAFZA (+415 bps). In Abu Dhabi, I would look at the 12's and 14's as they have not tightened as much as the 19's, Dolphin Energy (largest revenue contributor to Mubadala - +51 bps) and keeping in mind the Central Bank's willingness to support their banks, probably NBAD (+40 bps) and FGB (+145 bps), though I would like to get some more details on what level of support will be provided and how it will materialize. In Qatar, I would focus on the RasGas 14's (+18 bps) and RasGas 19's (+12 bps). The sovereigns have tightened to close pre-crisis levels, with the exception of the 15's and the 30's, and the Qatar 14's are trading at a 4% premium to where they were trading on the 25^th. I would be a buyer of the outliers – the 15's are trading 11 bps wider and the 30's are trading 15 bps wider. 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. I was recommending buying the CBB14 last week, but with yields contracting to current levels (4.18%), I think that trade has played out and the sukuk is trading close to pre-crisis levels, where I thought it was looking pricey.

I have been asked about TAQA recently – apart from being on credit watch negative, I would avoid Taqa exposure at this time for a couple of reasons. The primary reason is the fundamentals of the natural gas market – the outlook for natgas is that of diminishing prices on the back of a softening demand, limited storage capacity and an unprecedented gas glut with expected supply capacity to exceed demand through 2030. Prices for natgas and oil decoupled in 2009 –historically, supply / demand conditions were tight enough that a fall in the price of natgas would soon be corrected by a rise in demand and vice versa. This is no longer the case as natgas supplies are more than sufficient to meet both present and future demand. The market for natgas in North America remains soft partially due to a recent surge in discoveries and production of "unconventional" gas in the US spurred by new cost-cutting technologies for oil shale extraction. Taqa has exposure to the North American with power generation facilities in Michigan, gas productions facilities in Canada, and a stake in the Alliance pipeline, which moves Canadian gas into Chicago for sale into the US markets. Because of the softening of the North American markets, Taqa's exposure puts it in a more delicate position than its regional peers. I would consider alternatives such as Dolphin and RasGas instead of Taqa at this time.

The table below shows some of these names, and provides a comparison of how they were trading on the evening of the 24^th, the day before the Dubai World announcement, compared to end of day yesterday. As usual, I am highlighting the names in yellow that have seen large yield expansions and look attractive today.

Issue	Offer Yield - November 25th AM	Offer Yield - December 15th 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	5.3	5
FGB 12	4.04	5.49	145
NBAD 4.5 14	3.92	4.32	40
Dolphin Energy	5.38	5.89	51
CBB 14 Sukuk	4.07	4.18	11
DUGB 14$	6.32	7.39	107
DP World 17	7.11	8.24	113
JAFZA	8.11	12.26	415
Qatar 14	3.62	3.57	-5
Qatar 15	3.73	3.84	11
Qatar 19	5	5.02	2
Qatar 20	5.06	5.09	3
Qatar 30	5.84	5.99	15
Qatar 40	6.11	6.18	7
QTEL 14	4.2	4.27	7
QTEL 19	5.73	5.92	19
RASGAS 5.5 14	3.92	4.1	18
RASGAS 6.75 19	5.3	5.42	12

 

GCC Credit Thoughts – December 10, 2009

The Nakheel saga continues, with little additional clarity – Deutsche Bank, acting as Transaction Administrator on behalf of the Nakheel 09 certificate holders, held a "listen only" conference call yesterday. To participate, certificate holders were required to block of their holdings. It is my understanding that the call was uneventful, at best, and basically rehashed what we already knew. What is interesting, however, is that the group of bondholders represented by Ashurst (the law firm engaged to represent holders of the Nakheel 09 sukuk) has grown from 25% last week to just under 40% yesterday – this group is being led, as reported by the FT, by QVT, a New York based hedge fund. The FT reports that hedge funds focusing on distressed situations have been aggressively buying up the bond with hopes of influencing a settlement between creditors and the issuer. Their eyes have been on Dubai World's "prized assets", which they believe are up for grabs due to the cross default guarantee of the Nakheel 09's with Dubai world, and which are perceived to be more valuable than Nakheel's Dubai based real estate, which collateralizes the bond.

Istithmar is back in the papers this morning with a senior banker being quoted as saying that the company is "hugely leveraged" and that it is "in trouble." A former senior employee is quoted as saying, "People should be questioning all of Istithmar's assets. There is very little of worth left, and they have more debt than their assets are worth now." Istithmar lost control of the W Union Square in New York on Tuesday, at a foreclosure auction, when the hotel was sold to LEM Mezzanine for $2 million. Istithmar says that this was completely unrelated to the Dubai World restructuring that is currently underway. Other concerns within the Istithmar property portfolio include Adelphi on the Strand in London and the Fontainebleau Miami Beach Resort. The company has reportedly breached covenants on a $411 million securitized loan taken when acquiring Adelphi on the Strand. The building was purchased in 2006 for over $487 million, and because of the property crash in London, a breach of conditions has been triggered. The debt is managed by Barclays Capital Mortgage Services, the FT reports, has not called a default yet, but DW's current financial conditions is a cause of concern over the debt's serviceability.

DEWA responded to reports (and denied) that recent downgrades have triggered an accelerated payment clause on their $2 billion securitization program, which was issued under the banner of "Thor Asset Purchase Company", which would require a complete repayment by DEWA to the creditors on December 14, 2009, instead of the 2036, the intended maturity. "DEWA is very strong financially," a spokesman said. "There has been no request from banks."

Moody's has placed seven Abu Dhabi based companies on review for possible downgrade on the back of concerns of levels of Government support available to them. Moody's said that the reviews were based on "a need to re-validate and possibly reconsider our support assumptions following Dubai's recent decision to explicitly segregate its direct obligations from those of its [government related issuers]." Ratings adjustments could be minor, when support assumptions could remain high, and could possibly be multi-notch in cases where the base credit fundamentals are low. Affected companies are TAQA, Mubadala, TDIC, IPIC, Aldar, Etisalat and Dolphin Energy.

Perhaps in reaction to this, Aldar held an investor conference call yesterday, on very short notice. Highlights below:

• The purpose of the call was to highlight that Aldar was an integral part of Abu Dhabi's long term strategy to diversify revenues from hydrocarbon production, it was important to differentiate Aldar and Abu Dhabi from Dubai. Also, they wanted to emphasize that Aldar was delivering property projects to schedule and had sufficient funding to do so.
  
• Aldar has opened 8 hotels with 2428 rooms in total. 1200 residential units and 107k square meters of office space has been delivered 2009 YTD.
  
• Aldar plans to deliver 3000 new residential units and 40-50k square meters of commercial space over the next 12-24 months.
  
• Aldar will end 2009 with a cash balance of AED 11 billion and undrawn credit facilities of AED 2-3 billion. They expect to collect AED 2-3 billion in accounts receivable over the coming 12 months. CAPEX for 2009 should not exceed AED 15 billion compared to AED 13 billion at this time last year. CAPEX guidance for 2010 and 2011 estimated at AED 8 billion. Financial guidance in line with that provided at the end of Q.3.
  

The Abu Dhabi CDS was wider by over 20 bps and Qatar sovereign CDS was wider by 5-10 bps. The Abu Dhabi names were all better offered, and we saw spreads widen across the board on the back of the Moody's news. I am providing the same table I provided yesterday, that showcases some of the bonds that have been perceived by the market as higher quality names. Again, names highlighted in yellow have seen their yields expand more than 30 bps since November 25^th – the list grows! As I mentioned yesterday, I would not be a buyer at this time of the corporates, as, obviously, the situation continues to evolve and spreads widen. However, with the Abu Dhabi 12's offering 3.2% (55 bps wider than pre-crisis) and the Abu Dhabi 19's offering 4.1% (30 bps wider), they are beginning to look attractive. Another name to watch closely is the Qatar 15's – offering 4.11% (38 bps wider.)

Issue	Offer Yield - November 25th AM	Offer Yield - COB December 9th	Yield Expansion (bps)
Abu Dhabi Sovereign 12	2.65	3.2	55
Abu Dhabi Sovereign 14	3.8	4.1	30
Abu Dhabi Sovereign 19	5.25	5.4	15
Mubadala 14	3.81	4.3	49
Mubadala 19	5.88	6.17	29
TDIC Finance	4.37	5.19	82
TDIC Sukuk	4.21	5.18	97
Taqa 6.6 13	4.15	5.07	92
Taqa 14	4.52	4.99	47
Taqa 19	5.78	6.25	47
CBB 14 Sukuk	4.07	4.4	33
Qatar 14	3.62	3.77	15
Qatar 15	3.73	4.11	38
Qatar 19	5	5.12	12
Qatar 20	5.06	5.2	14
QTEL 14	4.2	4.39	19
QTEL 19	5.73	5.87	14
RASGAS 5.5 14	3.92	4.16	24

Pimco has been in the media saying that they have been buying Abu Dhabi and Qatari sovereign paper, as they consider it to be cheap, as well as RasGas, and would continue to buy in the event of a sell off. With a backstop like Pimco, additional downside may be limited.

Nakheel is refuting statements made in the papers yesterday that were claiming that Palm Jumeirah is sinking 5mm a year. They said that settlement was a normal occurrence following construction and there could be no conclusions drawn about the long term. This is SPECTACULAR news, especially in light of the fact that I signed a 1 year lease for an apartment on Tuesday, and yesterday's news had me visibly shaken!

GCC Credit Thoughts – December 9, 2009

The regional fixed income markets were weak yesterday, with Dubai related names being hit the hardest, on the back of continued fears that it would be more than just Dubai World that may have to deal with restructuring its debt, when all was said and done. The Nakheel 09's dropped more than 10 percent yesterday, and were bid at a low of 46.5, but closed the day at the 47/49 level. The market on the DIFC Sukuk was 52/57 at the end of the day yesterday – historical lows for that name. The Dubai CDS widened by 8.85% to 544.56, per Bloomberg. Barclays issued a research report with an opinion that "The market is pricing in a swift and orderly restructuring with no lasting effects on Dubai Inc……Based on our recent experience, we would argue that there is little chance of this materializing, and at this point, risk is skewed to the downside." This hardly helped sentiment, and we saw the contagion spread through the region, which resulted in spreads in the ex-Dubai names to also widen.

Istithmar, a part of Dubai World, lost control of the W New York, Union Square, hotel yesterday in a foreclosure auction. The hotel was purchased by Isthithmar in 2006 for $285 million. LEM, an affiliate of Lubert-Adler Real Estate Funds, bought out the debt on the hotel for a reported $2 million, effectively taking control of the property.

It was announced that Dubai Group, one of Sheikh Mohammed's investment vehicles, is looking to divest a $91 million position (DG owns 25%, and this sale would reduce their position to 20%) in EFG-Hermes, the largest publicly traded investment bank in the region. They are looking to sell their stake at a discount of up to almost 11% to yesterday's close.

DEWA news – The flurry of downgrades in Dubai has caused ripples that will have an effect into Dubai entities that would otherwise have been perceived as being healthy, viable businesses. DEWA has a $ 2 billion securitization program in place (in addition to a AED 3.2 billion sukuk which matures in 2013), under the name of Thor Asset Purchase Company, which issued notes in two tranches of $1 billion each, back in 2007 and 2008. DEWA is Dubai's only provider of utility services, and the notes issued under this program have an unconditional guarantee from the Government of Dubai – the Dubai DOF has been quoted as saying, "DEWA is a government company. Its debt is sovereign and the government remains 100% committed to meeting its sovereign debt obligations."

What has occurred over the past couple of days is that Dubai GRE's have been downgraded to sub-investment grade levels (see yesterday's afternoon note for details), with DEWA being downgraded by Fitch and finally by Moody's yesterday. Fitch's downgrade on November 30^th to below the single A grade (it is still investment grade at Fitch) triggered an accelerated payment clause which may result in DEWA having to repay the holders of these notes on December 14, 2009. Moody's moved DEWA to Ba2 from Baa2, which is officially "junk bond" status and cited "liquidity pressure due to the triggering of an acceleration clause" as the reason for the downgrade. There are reportedly three holders of these notes and all are said to be interested in waiving the acceleration, which leads me to think that they are most likely local banks. I was speaking with an accountant earlier today about further impairment charges that may have to be realized or provisioning that may have to be made by banks holding the Thor Asset Purchase notes, and he is of the opinion that there would likely have to be some provisioning issues, because the notes become current due to the trigger and a substantial change in terms/risk.

I think it's evident that I love my before and after comp. tables, and after the sell off yesterday, I wanted to provide an update on how some of the bonds that are perceived to be of higher quality within the region, Ex-Dubai, are faring. Again, I will use the morning of the 25^th as a point when it was the quiet before the storm and compare to yesterday's close. I have highlighted those names that have seen yields expand in excess of 30 bps.

Issue	Offer Yield - November 25th AM	Offer Yield - COB December 8th	Yield Expansion
Abu Dhabi Sovereign 12	2.65	3.02	37.00
Abu Dhabi Sovereign 14	3.8	3.97	17.00
Abu Dhabi Sovereign 19	5.25	5.28	3.00
Mubadala 14	3.81	4.18	37.00
Mubadala 19	5.88	6.1	22.00
TDIC Finance	4.37	5.14	77.00
TDIC Sukuk	4.21	5.06	85.00
Taqa 6.6 13	4.15	4.85	70.00
Taqa 14	4.52	4.87	35.00
Taqa 19	5.78	6.18	40.00
CBB 14 Sukuk	4.07	4.40	33.00
Qatar 14	3.62	3.71	9.00
Qatar 15	3.73	4	27.00
Qatar 19	5.00	5.09	9.00
Qatar 20	5.06	5.12	6.00
QTEL 14	4.20	4.46	26.00
QTEL 19	5.73	5.87	14.00
RASGAS 5.5 14	3.92	4.11	19.00

 

I believe we will see continued pressure on the regional bond markets, as this DEWA news picks up steam, and until there is more clarity, I would likely stay on the sidelines, as there is more risk to the downside. I would keep my eyes on the aforementioned names in the event that spreads widen dramatically, and then be opportunistic.