GCC Credit Thoughts – January 28, 2010

GCC Credit Overview – Wednesday's Recap

• Regional credit market remained weak and liquidity is still thin. The 45 bps widening in Greece 5 yr CDS, general weakness in equity markets around the world and the overall concern that economic growth will falter as the Fed and the ECB begin curbing stimulus measures, didn't help the negativity.
  
• Dubai sovereign spreads were marginally tighter though 460/480 (-5 bps) while the corporates continue to be for sale, getting cheaper by the day (especially DIFC and Dubai Holdings).
  
• Qatari paper remains well bid except for a slight sell-off in CBQ14s.
  
• Amongst Abu Dhabi names, the Taqas, ADCB 14s and TDIC were a touch weaker.
  
• We are seeing better buying in Dubai Financials (DIB Sukuk, Emirates Bank) and the region's financial subs in general.
  
• Etisalat has deferred a potential AED 1.8 billion bond sale, citing a cash balance of AED 10 billion, and the lack of need for additional capital.
  

 

GCC Credit Thoughts – January 26, 2010

Monday's Recap

• Spreads on GCC Sovereigns opened tighter yesterday, but were trading as wide as Friday's close towards the afternoon.
  
• The CEEMEA SovX Index, however, was trading tighter at 221 bps (-5bps).
  
• Our desk saw better buying in the Mubadala 14s, the TDIC 14s and the Qatar15s & 20s. We are also continuing to see good two way flow in the DUGB 14 USD.
  
• S&P lowered its rating on Dubai Holdings from BB+ to B citing "lack of information" and said that they expect cash flow generation from Dubai Holdings to be materially weaker than they had initially expected. S&P also said that the market is still lacking "information on potential ongoing government support" and that because of this, S&P was no longer factoring the potential for this support into their rating. They followed the downgrade by withdrawing their rating on DH altogether. DH responded by saying, "Although DHCOG has been engaging S&P and sharing adequate information frequently and in a transparent manner, S&P and nevertheless issued inaccurate statements coupled with factual errors that are misleading…DHCOG discredits and disagrees with the content of the latest S&P report dated 25 January 2010." DH then proceeded to drop S&P as a rating company citing "lack of understanding of the business."
  
  • This sort of news would have clobbered the Dubai Inc. names in normal circumstances, but because volumes have been so anemic lately, it had little real effect. Dubai Inc. names opened weaker in the morning, prior to this news, and continued to hold those levels through the day. The Dubai sovereign sukuk opening tighter in the morning, compared to Friday's close, but widened over the day. Weakness in Dubai wasn't a direct effect of the S&P / Dubai Holdings news.
    

Dar Al Arkan – I attended the roadshow presentation in Dubai yesterday – very impressive turnout. There is definitely interest in this name, as it is the first new issue from the region post Dubai World. It is also a non-investment grade issuer, which should set the benchmark for pricing for other corporates looking to turn to the global debt markets early this year. It is also a key issue because it will show the investor appetite for real estate related plays in the region. The big question mark here is pricing – how aggressively will the company be open to pricing the deal vs. what are the buyers demanding. I had estimated yesterday that pricing would be in the 9% range – after talking to a number of clients, it looks like they would be looking for levels SIGNIFICANTLY higher than that, to make the deal interesting. The Company says that they had enough cash in the bank to repay the sukuk that matures in 2010 at the end of 2009 – if new money will be so expensive (double digit yields), why not just pay that off and THEN come to market – may be a little cheaper then. Dar Al Arkan says that the capital they are looking to raise is actually to help finance $720 million in Capex over 2010. Book runners are guiding towards the end of the week for more clarity around size, price, timing etc.

Emirates NBD – ENBD, who was on a roadshow towards the end of 2009, looking to issue bonds, has said that they will not be tapping the markets during the first half of 2010. The bank has two bonds that mature in 2010 – one in Q.1 and one in Q.4 – both $750 million in terms of size.

I am going to reiterate the position I had taken at the start of the year – there are 3 names to own in Dubai that I think are no brainers, and 1 that involves a little more risk (I'm not going to get into details reasons why I like each of the name I mention – please see my note from early this year or please give me a call to discuss.) (1) Dubai Sovereign sukuks offering 8.33% for 5 year sovereign paper are a steal – they need to be owned. They are trading 250 bps wider than the RAK 5 year paper – I don't know what Bizzaro world that makes sense in??!!?? JAFZA and DP World have been ring fenced as strategically important to Dubai – I would argue that they are significantly important to the UAE as a whole. (2) JAFZA 2012 paper offers an YTM of 12.90% - levels wider than December 31, 2009! Buy it. (3) DP World I'm a little less enthusiastic about – not because I don't think it's a great proxy to a recovery in global trade in 2010, but because 17s spread to the Dubai sovereign is only 30 bps or so – It's a good buy, but I like the Dubai Sovereign better and the delta in yield doesn't excite me – if you own it, keep it – I wouldn't rush out to buy it today. Now for the name that hasn't been ring fenced – a little more risk for a lot more return. (4) DIFC Sukuk - DIFC's have given back all the gains made during the second week of January, and are now trading at similar levels to the start of the year. At 17.76%, they are looking attractive again, and I think they are both a good short term, as well as a long term play.

 

GCC Credit Thoughts – January 25, 2010

Friday's Credit Overview

• Regional sovereign spreads were unchanged to marginally tighter having widened significantly on Thursday. The Dubai 5 year CDS closed wider by more than 25 bps on Thursday.
  
• The newly launched CEEMEA SovX Index was trading wider by 5 bps at 230.
  
• We saw spreads in the UAE corporate and financials tighten, with the exception of JAFZA, FGB 12's and the DPW sukuks (both the 17's and the 37's) which sold off through the day. Abu Dhabi quasi sovereigns, particularly Taqa, were well bid over the session.
  
• Volumes remain light-ish
  

Buyers of:

• Qatar15s
  
• Mub14s
  

Sellers of:

• Taqa13$
  
• Mub19
  
• Dolphin
  
• Rak14s
  

 

In the news

• Dubai Holdings, Sheikh Mohammed's investment company, who the market was speculating was going to be the next Dubai entity to announced a restructuring, paid $100 million of scheduled coupon payments, due on three outstanding bonds, yesterday. Per a statement made to Nasdaq Dubai by Dubai Holdings, the following coupons were paid:
  
  • $828,650 paid on its $500 million note with a 2012 maturity
    
  • $50.3 million paid on its 750 million Euro note with a 2014 maturity
    
  • $48.3 million paid on its 500 million Pound Sterling note with a 2017 maturity.
    
• Saudi Central Bank Governor, Muhammad Al Jasser, announced on Sunday that the Kingdom's first mortgage law will be issued in the next few months. This is the start of legislation that is expected to boost home ownership among the indigenous population. The market has been looking forward to this law to be enacted over the past two years – Mr. Al Jasser said that the legislation will consist of 5 parts, and this law expected over the coming months will be the first of those parts. "It will define the terms of mortgages, how they are designed, how they are granted, how companies are license and how procedures will be enforced. The law is on the way to the council of ministers before going to Shura Council, the country's consultive assembly, for final approval."
  
  • Saudi Arabia has a young population, a growing population, low percentages of home ownership, and a small size of household, when compared to other countries in the GCC – there is also a marked shortage of affordable housing available to the middle market – These factors are what make up the reasons to own Dar Al Arkan credit. Please see my note from last week on why I like Dar Al Arkan.
    

New Issues Expected

• Dar Al Arkan – Currently on a roadshow to market a new sukuk issue to refinance the $600 million sukuk that matures in March 2010. Size and pricing is still unknown, but the Dar Al Arkan 12's are currently offering 8.31%, so we would need to add to that for an additional 4 years of curve plus the fact that it is the first offering for 2010 in a sector that has seen its shares of bumps – I would expect this issue to be priced in excess of 9%.
  
• Bahrain Sovereign – The Central Bank of Bahrain announced yesterday that it is planning a $1 billion, 10 year, conventional bond issue that will be targeted mainly to a US based investor base. Timing around this is issue is expected for end of Q.1 or early Q.2 2010. The Bahrain 5 year sukuk is currently offering 4.23%, 51 bps wider than the Qatar 14's and 55 bps wider than the Abu Dhabi 14's. If we assume a similar discount for the 10 year, ballpark pricing for the new issue should be in the neighborhood of T+210 (5.71%) – T+226 (5.88%).
  
• Aramco – In mid December, Aramco had appointed DB, Samba and Banque Saudi Fransi to raise a $1 billion sukuk to assist in the financing of a $9.6 billion JV refinery at Jubail. The sukuk, denominated in SAR was targeted for the Saudi market, and HSBC had been tapped as the banker to arrange for an International component, should the need arise. Timing was estimated to be Q.1 2010 – recent chatter in the market, over the past couple of days, is that the timing is very near term, so we should be getting some details soon. Expect it do well, given that it is being targeted towards Saudi and there is no public debt for the company – investors should be all over it.
  
• DEWA – The Dubai Electricity Water Authority is expected to issue a $1.5 billion bond in Q.2 2010 – not much in terms of details yet.
  
• UAE Sovereign Bond – In June 2009, the UAE announced plans to issue its first sovereign bond to fund infrastructure and other spending, but said it was yet to set its timeframe and size. A senior Finance Ministry official said yesterday that the bond will come to market in late 2010 or early 2011.
  

GCC Credit Thoughts – January 21, 2010

• Regional credit had a weaker tone yesterday as well with the Dubai 5 year CDS widening by another 10 bps. Dubai Inc. paper traded down, on the back of this, with the exception of JAFZA. The distressed names (Dubai Holdings, DIFC, Nakheel) were all trading a point lower and ended the day better offered.
  
• The Abu Dhabi and Qatari financials seem to be back in favour again, and we are seeing good two way flow on names like NBAD, ADCB and COMQAT (19s).
  
• The spread between the TDIC conventional paper and the TDIC sukuk is tightening – the conventional bonds were trading cheap, compared to the sukuk (probably due to TDIC being one of the few high grade sukuks available to a market hungry for Shariah compliant product,) but we saw yields contract yesterday as buyers stepped in.
  
• Emirates Business 24/7 reports today, "Dubai could spend about $3 billion (Dh11bn) on transport infrastructure projects in 2010 as it looks to boost the economy and has no issue paying its contractors, said the executive director of the Roads and Transport Authority (RTA).The government has positioned its infrastructure development as central to its status as the Middle East's commercial and tourism hub and has continued to invest in the sector. 'Investing in infrastructure is the driving force for the economy,' Mattar Al Tayer, Chairman of the Board and Executive Director of RTA, told a news conference yesterday. 'We have Dh10.5bn budget for this year and we will spend more in the future,' he said, later adding that could rise to Dh10.7bn. "
  

Dar Al Arkan – Looks like DARARK is embarking on a global road show to market a new sukuk – the first sukuk offering for 2010. They announced their schedule yesterday, which is looking like the following: Jan 21-22 in London, Jan 24 in Riyadh, Jan 25 in Dubai and Abu Dhabi, Jan 26 in Singapore - they also plan to be in the US in late January. Not too much in terms of details around the size, timing and pricing, but we do know that the lead managers are Deutsche Bank, Goldman Sachs and Unicorn. The netroadshow is available to those interested at www.netroadshow.com, and the password is DEVELOP48.

S&P and Moody's both rated the proposed new issue – Ba2 by Moody's and BB by S&P. The ratings may seem a little low (the 10's and 12's are NOT rated by the agencies), but Moody's says in its report, "The (P)Ba2 CFR is one of the highest industry ratings; the mean rating of global homebuilding companies is Ba3. The (P)Ba2 rating also positions DAAR well above regional peers in the GCC countries (with individual Baseline Credit Assessments being the comparable rating level)."

This looks like it's the first new issue out of the region for 2010 – EXCITING!!! I think that this deal will obviously be used to pay off the $600 million sukuk that Dar Al Arkan has maturing in March 2010. This seemed to be the market sentiment, also, and we saw the sukuk offered up 1 point, at the par level. Like I have been saying for the past few weeks – I'm bullish GCC credit for 2010 - Especially for Shariah compliant product. There is such a dearth of product available in the market to serve a growing demand – if this deal is priced well, I expect it to be well subscribed from within the region (especially Saudi Arabia.)

Dar Al Arkan is a well respected company that has a history of greater transparency than its regional peers – investors seem to like management and their response to investor queries. Where does it price? The Dar Al Arkan 12' are currently yielding 8.30% - since this will probably be a 5 year issue, technically, the company would need to pay up for an additional 3 years of curve– since it's the first deal from a market that has taken its fair share of lumps over the past 6 months, the company would need to pay up even more – the fact that it's real estate backed sukuk, even more. I think that we see it priced in excess of 9%. With the fundamentals surrounding Dar Al Arkan, and the environment it operates in (as outlined below), I would be a buyer at those levels. It's a quality company, serving an underserved market segment, in a growing market – large land banks, fairly valued to cover all debt outstanding – well run, relatively transparent and rated better than regional peers on a standalone basis. In a market looking for investment opportunities in the sukuk space, I think this is one of the less risky ones – with a 9+% coupon, it makes sense.

Dar Al- Arkan – An Overview (Data thanks to Moody's)

Dar Al Arkan is a leading real estate development company in the Kingdom of Saudi Arabia, specializing in the residential market. The offers direct exposure to the Saudi housing market, which is set to experience robust growth for the next five years on the back of growing demand (population expected to reach 30 million by 2015, a shortage in quality supply, a young population, small household sizes and an increase in home ownership (plans to increase from 55% in 2004 to 80% in 2020.) The Company has a very large land bank in the major cities of Saudi Arabia that has a book value (accounted for at cost in September 2009) that covers all debt outstanding. The progression of Dar Al Arkan from a small real estate developer to one of the largest in the Kingdom is a result of consistent growth since its inception.

The Kingdom of Saudi Arabia offers favorable demographic conditions for a company such as Dar Al-Arkan. Saudi has a relatively young population (particularly among Saudi nationals) and growth rates are high. It is estimated that in 2005 about 37 % of the population was below the age of 15, 56 % below the age of 25 and almost 61 per cent below the age of 30. Population growth is expected to remain high and, therefore, Dar Al Arkan's management expects the rate of new household formation to continue to rise for the foreseeable future - a very positive catalyst for the company's future growth. Saudi Arabia's residential market mainly targets Saudi nationals rather than the typical expatriate community, which is a key differentiator from other countries in the GCC. Saudi's domestic population accounts for 73% of the Country's total population, compared with about 20% in the UAE and Qatar, which results in more sustainable growth in housing demand. More than half the population do not own their homes and a shift to ownership is needed, which suggests that strong demand will come from the middle and low income segments of the housing market – both areas in which Dar Al-Arkan is involved in. Also, there is a new mortgage law in being passed in Saudi, which is in its final stages of approval that will ease lending requirements for borrowers – this should have a considerable impact on new home sales in Saudi Arabia. Add all of these factors together, and Dar Al Arkan seems like a definite go to name for investors looking for a quality sukuk investment.

GCC Credit Thoughts – January 19, 2010

• The GCC credit markets were relatively quiet yesterday as the US markets were closed for Martin Luther King Day.
  
• Our desk saw selling in TDIC, TDIC Sukuk, Rasgas 14 and Rasgas 20 early in the day. Dubai was also better offered and we saw offers stack up on the Dubai sovereigns, DPW 17s and JAFZA, both of which were trading slightly lower on the day.
  
• We continue to see two way interest in both CBB14 and RAK14 sukuks.
  
• Dubai clarified the status of their planned $20 billion bond issuance program – the program is now "technically complete," and $4.1 billion has yet to be drawn down. The initial $10 billion was subscribed to by the UAE Central Bank in February 2009, $5 billion was subscribed to in November by both Al Hilal Bank and National Bank of Abu Dhabi, and the final $ 5 billion was subscribed to directly by the Abu Dhabi Government. An unnamed Dubai Government spokesman is quoted as saying that $4.9 billion remains untouched (the first $10 billion was spent, and of the second $10 billion, $4.1 billion was used to service the Nakheel 2009sukuk) and Dubai has no immediate plans to raise additional capital (until they utilize all that was made available to them last year.)
  

 

GCC Credit Thoughts – January 18, 2010

• On Friday, the regional credit market was a weaker in line with global equity and credit markets. Both the CDX and Itraxx IG Indices closed wider by 4-5 bps on the day. In the GCC, Abu Dhabi quasi sovs were soft in particular and we saw selling in the Mubadalas, Dolphins and across the Taqa curve.
  
• In Qatar, profit taking continues across most of the sovereign curve. The 19's and the 40's saw no correction, but the other maturities have seen profit taking over the past couple of sessions. The 30's widened by 7 bps over Thursday's close and are now offering 6.12% - 28 bps wider than November 25^th levels. The 15's are looking like an interesting trade again – wider by 3 bps over Thursday's levels (have been widening by 2-3 bps every day over the past few days) and now trading 16 bps wider than November 25^th levels.
  
• News over the weekend on DEWA deferring its $1.5 BN bond sale till Q.2 2010, citing weak market conditions – DEWA's CEO is also optimistic that the company will get upgraded by the ratings agencies (Moody's Ba2, S&P BB+). They money is being raised to fund DEWA's growth plans.
  
• Additional clarity has been provided to the market regarding the $10 billion lifeline that Dubai received from Abu Dhabi to help settle the Nakheel 2009 sukuk – it looks like the additional amount provided was only $5 billion and the second $5 billion was the amount committed by Al Hilal Bank and NBAD on November 25^th (a few hours before the Dubai World standstill news.) Of the bank's $5 billion commitment, it is speculated that $1 billion has been drawn down – the press is reporting that Abu Dhabi's Department of Finance may assume the remainder of the banks' $5 billion purchase commitment, relieving the banks of their burden.
  
• The market continues to look soft this morning – definitely better offered - London is just opening up and it's very quiet.

Trade Idea

NBAD has 2 sub-ordinate convertibles, the 2016s and the 2018s. The 18s are liquid and trade in the market (last close 80.5 – 81.5) while the 16s are very illiquid. Since both of them are trading way out of money so we'll consider the call option value to zero and treat them as normal bonds.
NBAD18s at a mid price of 81 gives a yield of 4.43% - if we price it to the call date (2/28/13) the yield is 8.6%. Since NBAD16s are very illiquid, we can use more aggressive pricing assumptions when a seller is identified. Even though it's shorter dated paper, we can assume a discount over the 18's – if we assume a 75 bps discount to where the 18's are trading, we come up with a yield of around 5.20, which results in a dollar price of $83.98. That price level results in a yield to call of 17.71%. So, if you believe that there is a possibility that the NBAD 16's may be called by March 2011, this is a great trade because you can pick up 17.71%. These bonds would be called if the cost of funding (at any point before the call date) is lower than what NBAD is paying on these bonds – they are currently paying EIBOR + 25. So if you are bullish NBAD, and believe that credit conditions will ease for the company and for the GCC as a whole, buy these bonds.

Issue	Offer Yield - November 25th AM	Offer Yield - January 18th AM	Yield Expansion (contraction) from 11/25 - bps	Yield Expansion (contraction) from 1/15 - bps
Abu Dhabi Sovereign 12	2.65	2.13	-52	-1
Abu Dhabi Sovereign 14	3.80	3.69	-11	0
Abu Dhabi Sovereign 19	5.25	5.16	-9	3
Mubadala 14	3.81	4.46	65	6
Mubadala 19	5.88	6.46	58	1
TDIC Finance	4.37	5.35	98	0
TDIC Sukuk	4.21	5.13	92	0
Dolphin Energy	5.38	5.61	23	3
Taqa 6.6 13	4.15	4.96	81	7
Taqa 14	4.52	4.99	47	12
Taqa 19	5.78	6.39	61	-2
Aldar 14	6.41	7.38	97	0
FGB 12	4.04	5.24	120	0
NBAD 14	3.92	4.47	55	0
ADCB 14	5.28	6.56	128	0
DIFC	7.06	15.41	835	0
JAFZA	8.11	11.83	372	2
DP World 17	7.11	8.26	115	0
Dubai Sovereign USD	6.32	7.69	137	3
Dubai Sovereign AED	5.55	6.46	91	0
CBB 14 Sukuk	4.07	4.18	11	-3
RAK Sukuk	5.60	5.71	11	0
Qatar 14	3.62	3.70	8	3
Qatar 15	3.73	3.89	16	3
Qatar 19	5.00	5.01	1	0
Qatar 20	5.06	5.09	3	2
Qatar 30	5.84	6.12	28	7
Qatar 40	6.11	6.31	20	-2
QTEL 14	4.20	4.11	-9	0
QTEL 19	5.73	5.88	15	4
RasGas 5.5 14	3.92	3.96	4	-1
RasGas 8.294 14	5.26	5.30	4	-2
RasGas 6.75 19	5.30	5.28	-2	0
CBQ 14	5.00	5.26	26	0
CBQ 19	7.36	7.48	12	0

GCC Credit Thoughts – January 15, 2010

Happy Friday – Profit taking and low volumes seem to be the story over the past couple of days – nothing major to really talk about, hence my radio silence.

• GCC credit ended the local week yesterday weaker on the day with pretty much all names trading wider.
  
• After the rally we have seen in the markets in 2010, we are seeing opportunistic profit taking, and continued nervousness around the DW restructuring isn't helping whet most investors' appetites.
  
• Nakheel announced earlier in the week that they would be paying the upcoming $10.3 million coupon on the $750 million Nakheel 11 sukuk – again, interesting a days when the confirmation of intent to pay a coupon is considered a news headline! There was some chatter in the market about Nakheel paying off the 2010 sukuk in full (AED 3.6 billion) and that resulted in the 2010's popping up from the high 60's to the mid 70's – offers had moved up to the high 70's / low 80's. We are now seeing better selling at the $74 / $75 level, as the euphoria is cooling off.
  
• The Dubai CDS widened by 9-11 bps to 420 mid – we are seeing weakness creep into the DUGB USD 14's and they came off by 1/ 2 point yesterday to 94 5/8 – 95 5/8. Dubai corporate were seeing low volumes – JAFZA and DH were off by ¼ - ½ points each
  
• The Abu Dhabi CDS was trading wider – 135 mid and the sovereigns were trading flat on low volume. The corporates were quiet; a touch weaker over the day, but Aldar was the outlier. Buying interest came into the desk in the morning, but clients were looking to the left side of the screen by mid day.
  
• Qatar was quiet – the CDS widened marginally to the 86 levels. We saw the front end of the Qatar curve under pressure, as it has been looking a little rich – profit taking, again. Qatar Real Estate Investment Company (QREIC or Alaqaria) was downgraded by Moody's from A2 to Baa1 as a result of a reduction in assumed government support after Barwa Real Estate's "tender offer for all shares of QREIC with the goal of consolidating QREIC as a subsidiary of Barwa."
  

Issue	Offer Yield - November 25th AM	Offer Yield - January 15th AM	Yield Expansion (contraction) from 11/25 - bps	Yield Expansion (contraction) from 1/12 - bps
Abu Dhabi Sovereign 12	2.65	2.14	-51	-40
Abu Dhabi Sovereign 14	3.80	3.69	-11	-7
Abu Dhabi Sovereign 19	5.25	5.13	-12	-7
Mubadala 14	3.81	4.40	59	6
Mubadala 19	5.88	6.45	57	5
TDIC Finance	4.37	5.35	98	3
TDIC Sukuk	4.21	5.13	92	9
Dolphin Energy	5.38	5.58	20	2
Taqa 6.6 13	4.15	4.89	74	7
Taqa 14	4.52	4.87	35	0
Taqa 19	5.78	6.41	63	-1
Aldar 14	6.41	7.38	97	-7
FGB 12	4.04	5.24	120	5
NBAD 14	3.92	4.47	55	3
ADCB 14	5.28	6.56	128	27
DIFC	7.06	15.41	835	72
JAFZA	8.11	11.81	370	63
DP World 17	7.11	8.26	115	20
Dubai Sovereign USD	6.32	7.66	134	39
Dubai Sovereign AED	5.55	6.46	91	3
CBB 14 Sukuk	4.07	4.21	14	26
RAK Sukuk	5.60	5.71	11	0
Qatar 14	3.62	3.67	5	0
Qatar 15	3.73	3.86	13	3
Qatar 19	5.00	5.01	1	3
Qatar 20	5.06	5.07	1	1
Qatar 30	5.84	6.05	21	-4
Qatar 40	6.11	6.33	22	0
QTEL 14	4.20	4.11	-9	-1
QTEL 19	5.73	5.84	11	-4
RasGas 5.5 14	3.92	3.97	5	0
RasGas 8.294 14	5.26	5.32	6	0
RasGas 6.75 19	5.30	5.28	-2	0
CBQ 14	5.00	5.26	26	9
CBQ 19	7.36	7.48	12	6